As Fintech, banking innovation, and technological advances speed forward, banking consumers and the banking sector are seeing drastic changes in how we as a society interact with money. In the simplest sense, there is a big shift in how consumers want to interact with their banks, which has forced many in the banking industry to adapt to these changes.
By decentralizing and outsourcing many aspects related to banking, while introducing new aspects, banking as a service is taking over. And, with cryptocurrency and AI on the horizon, there is no telling how powerful banking as a service will become.
How banking as a service works
Banking as a service (Baas) technology can be thought of as similar to those other as-a-service models. BaaS provides a comprehensive financial service, integrated banking services, and customer support tailored for the needs of the customers within that banking network.
In the as-a-service model, banking as a service might offer all of the services that an individual needs, but each of the unique services are separated into “stacks” and delivered through powerful technology. The two most common types of service stacks are API-based and Cloud-based stacks, although the evolution of the fintech industry has made the API-based stack obsolete!
Consider the API-based stack to be three-layers. At its base level, a BaaS will be operated by an “infrastructure-as-a-service” or a traditional bank that is regulated and licensed, and then above that financial institution would be a centralized middleware layer known as “bank as a service.” On top of this second layer is decomposed banking services, which largely consist of fintech startups and other service providers.
Cloud-based stacks go above and beyond API-stacks where instead the regulated banks are owned by the fintech startups. The Cloud-based stack offers four main services, organized like so:
- Infrastructure as a service (IaaS): This is basic technology infrastructure for providing financial transactions. IaaS services would be on-demand and will involve the server and hardware necessary for communication.
- Banking as a platform (BaaP): Here is the fully licensed bank or an external regulated bank licensed banking services. Fintech SaaS will be added into this layer; data security is crucial here. Much of BaaP will be spent monitoring and seamlessly providing security and authorization.
- Fintech SaaS: FinTech software as a service (SaaS) is the composite software-based financial services that are on-demand. To operate within the banking as a service model, the Fintech SaaS technology must be compatible with the Banking as a Platform (BaaP) API specs. This layer makes traditional banking services virtual, although it makes verification very difficult.
- Huaas, or Humans as a service: This is the top-most layer of the cloud-based BaaS and really focuses on the humans that are enabling the BaaS to function, even though many of the services provided can become automated on the user-end. Of course, many don’t believe that this aspect can be fully automated since banking customer service is about connecting with other humans to provide customer satisfaction.
So instead of signing up for a legacy banking service and needing to connect banking services, APIs, and other authorizations together, the BaaS provides this banking technology in an effective and timely manner.
In order to understand what these acronyms and jargons mean in a real-world context, here’s an example:
You fly to a destination using Airlines 101. On the trip, you see that you can sign up for an Airlines 101 credit card, receive air miles, and reap value-based rewards by shopping with a partner website but doing so through the Airlines 101 website. You can do all this on a mobile app, and you can even link your own bank account to the app to transfer rewards to your bank account.
We might interact with something similar to the example on a daily basis.
Technological trends in banking as a service
Banking as a service should not be confused with open banking, which might seem to offer similar benefits. Do you own a retail bank credit card? Or do you work with investment banks to manage your portfolio? These models depict open banking.
Open banking, which still connects a bank to something other than a bank (like a retailer) with an API, has a different set of purposes and is not classified as banking as a service. Open banks are more like third-party services providers and will connect a non-bank to the customer bank account data in order to provide account insights or issue payments.
The BaaS model and the banking industry are moving away from traditional banks to provide digital bank services. The business that offers banking as a service can offer more to the customer, such as account management, digital lending services, and integrated URL payments.
Many of the technological trends that BaaS can take advantage of focus on how banking products are delivered. For example, BaaS looks to infrastructures that are built on banking APIs (application programming interface) to be a strong intermediary between banks and Fintech services.
By being more malleable, BaaS can provide a lot of security in a small bit of information, allowing more industries to reap the benefits of fast and smart money management and being a gateway for how money moves in the financial industry.
How banking as a service is adapting to meet customer expectations
Whatever the banking service is doing to adapt to customer expectations, they are doing it well. Results from the World Retail Banking Report 2019 reported that 75% of consumers use at least one financial product from a big tech company, and more and more customers are choosing these non-traditional, digital banking options because they are offering lower fees, better customer experience, and increased speed in money transfers.
Because BaaS is deregulated, this means that banking services can be offered to more markets more freely, often with less restrictions and minimal fees. From SMEs to immigrants, BaaS serves the “underbanked” or “unbanked” peoples.
By providing simple financial technology at your fingertips, BaaS and fintech companies are doing what traditional financial institutions and credit unions wouldn’t do, which is provide people who would traditionally not be trusted financially with a way to gain trust, providing for them low-fee or zero-fee checking and savings accounts, debit cards, and credit cards.
BaaS fintech leaders are also providing a lot of services that are deemed simple in action but complex when it comes to security, all of this in a versatile and completely secure mobile banking app.
Sila is a perfect example of how successful a BaaS can be; as a fintech company, Sila provides an SDK that developers and business owners can use to create their own banking app, with each of the vital elements fully secured and outsourced. Not only is this drastically speeding up the time to market, but because Sila’s app can facilitate cryptocurrency transfers, pegged to the US penny, the app is revolutionizing global, mobile banking.
In this way, the groups of people who have been notoriously under-serviced are able to build up their financial portfolio to be able to function more efficiently with a global economy, even if their local economy is limiting.
Future of banking as a service
It’s clear that AI is the next level for fintech and banking. As Fintech continues to evolve, it is only a matter of time before the human aspect becomes too slow. AI technology has shown promise in the start up sector because it provides reliable and secure automation in addition to intelligent automation for basic services.
In addition to providing services, AI technology can quickly provide customer data to offer critical insight so start up firms can stay on top of technological advances, consumer pain points, and more. At its base level, AI technology already provides banking customers with insight into spending behaviors and saving habits. On the business level, AI can provide intelligence and analytics so key decision making can happen more efficiently.
Furthermore, cryptocurrency, which is striving to soon be a fiat currency, can also open up the future of BaaS services by deregulating currency. With this clout, cryptocurrency can allow residents in countries with notoriously inconsistent currencies, economic markets, or failing economies to survive a financial recession by pulling their money out of legacy banks and into the cryptocurrency market.
If the currency gains traction with other residents and this technology is enabled, cryptocurrency could even save economic markets. And cryptocurrency can be facilitated by banking as a service system technology, notably an ACH API in order to put money into the hands of more people.