Why Legacy Banks Should Embrace BaaS

There’s a particular dichotomy when it comes to traditional banks and banking-as-a-service (Baas) companies. For a long time, the former dominated the financial services industry with little or no challenge to that dominance. More recently, though, fintechs and BaaS have emerged and changed everything in the financial services game — from B2B payments to how merchants and healthcare professionals service their customers, leaving the legacy banks scrambling to keep up. 

But what if the banks didn’t have to compete with the BaaS providers? In this post, we’ll explore how the various parts of the BaaS ecosystem benefit and discuss how legacy banks stand to gain more by adopting BaaS instead of competing with it.

What is Banking as a Service?

In essence, BaaS (Banking as a Service) refers to an ecosystem where a non-banking company utilizes the infrastructure of a financial institution, often in the form of an API, to provide banking services to their customers.

Who’s Who in the BaaS Ecosystem

The BaaS ecosystem usually comprises four key players:

1. End Customers
2. Businesses and Brands
3. Fintechs
4. BaaS Providers

Let’s delve into how BaaS benefits each of these players involved in the ecosystem.

BaaS Providers

The global digital banking market is projected to reach a valuation of $8.7 billion by 2027, based on ongoing projects. BaaS providers are positioned to thrive, given their central role in this market. They stand to make significant profits from transaction fees they charge, while also spearheading industry innovations that give them a substantial degree of control over their own success.

Fintechs

Fintech firms can reap significant benefits by adopting BaaS solutions. Creating software can be a costly and time-intensive process, but by embracing pre-existing solutions, startups can reduce their time to market and iterate more quickly to identify a product-market fit. By doing so, fintechs can save on development and licensing expenses, while the BaaS layer furnishes the essential data infrastructure that facilitates communication between end-users and banks.

Businesses

Businesses are reaping the rewards of BaaS, largely due to the benefits it provides to customers. A positive customer experience translates into greater purchasing frequency, larger transactions, and increased profits. Good customer experiences also foster greater brand loyalty. Furthermore, companies that implement embedded finance into their platforms can save on the infrastructure necessary to support traditional bank systems.

End Customers

The primary beneficiary of BaaS is undoubtedly your business’s customers. By embracing BaaS, your customers can enjoy several benefits, including greater convenience, faster transactions, and an expanding selection of payment options. This means that customers have access to tools that simplify and enhance the purchasing experience, making it easier and more enjoyable than ever before.

It’s not hard to see how these pieces all fit together. But there’s a fifth party in the banking-as-a-service mix, or there can be at least: banks. 

How BaaS Can Benefit Legacy Banks

There is a common misconception that fintechs and traditional financial institutions are at odds and must compete with one another. While there is some truth to this notion, there is an alternative approach. Rather than competing, legacy banks can benefit greatly by adopting BaaS solutions.

By adopting BaaS, traditional banks can:

1. Expand their reach
2. Collaborate more closely with innovators
3. Reduce the cost of digitization

Let’s explore these key benefits of BaaS for traditional banks.

1. Expanded Reach for Banks and Service Providers

In today’s world, consumers have come to expect one-click solutions that provide a streamlined and seamless experience. While this is beneficial for both customers and businesses, it means that companies must strive to meet these expectations. One way to achieve this is by offering embedded services such as BNPL or point-of-sale credit, which can go a long way in meeting customer needs.

Embedded products also provide businesses with access to vast amounts of data about spending habits and customer preferences. By leveraging this data, companies can gain a deep understanding of each customer and provide more personalized services.

On the other side of the BaaS relationship, financial institutions that collaborate with businesses to offer embedded products can also benefit. By accessing customer data, banks can reach a greater number of potential customers without incurring high acquisition costs. Additionally, banks can offer services to underbanked or underrepresented customer segments, further expanding their reach.

2. Increased Collaboration Between Banks and Fintech Innovators

While there is some competition between traditional financial institutions and newer fintechs, there is also significant room for collaboration, which is fostered by BaaS.

The primary purpose of banks is to create and offer financial products and services, often through partnerships with providers. However, maintaining these relationships at technical, business, and operational levels can be expensive. Additionally, banks must keep up with the rapid innovation of fintechs and the resulting regulatory requirements.

Despite their best efforts, banks have struggled to develop product APIs that can effectively compete with fintechs. However, by embracing BaaS instead of trying to compete with it, banks can tap into its remarkable capabilities and exchange, while the fintech provider gains access to the bank’s facilities. Ultimately, this results in a win-win situation for both parties.

3. Reduced Digitization Costs for Banks

As the world becomes increasingly digital, traditional financial institutions are struggling to stay relevant due to their outdated technology, which leads to inefficiencies and underperformance.

In contrast, fintechs are driving the digitization of financial services and can offer the same products and services as legacy banks to a larger customer base and at a lower cost. Some fintechs have even obtained the necessary banking licenses to provide BaaS to non-financial businesses.

This has resulted in a rush for traditional banks to catch up through significant investments in digitization each year. However, this approach alone will not give legacy banks a competitive edge.

Instead of struggling to catch up, a more effective strategy for traditional banks would be to embrace BaaS. By adopting BaaS, legacy banks can embed their existing products into a wider range of digital platforms in various industries such as healthcare, e-commerce, travel, retail, and more, providing access to a broader customer base.

Final Thoughts

Rewrite without losing meaning: Fintechs will continue to drive innovation in financial services. BaaS is one of the areas that will grow at a rapid clip and further the democratization of finance. So far, traditional banking institutions have shown how impractical, ineffective, and expensive it is to try and compete with this reality. But for those legacy banks that embrace  BaaS, there’s tremendous potential to prosper in an increasingly competitive financial landscape.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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