Banking as a Service vs. Neo Banking

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With the rise in financial technologies and their applications, we’re starting to see more services pop up that can deliver targeted and secure banking solutions. If you’re in the fintech industry, you may have heard of banking as a service and also neo banking. These are two distinct sectors within fintech that provide banking services for consumers and they aren’t the same. 

As a payment services provider, we’re on the cutting edge of fintech along with other banking service providers. To help you understand these different services, this blog compares banking as a service and neo banking providers.

Making Sense of Fintech and Banking Solutions

With the rise of financial technology applications, we are starting to see new models of offering financial services. For example, there are payment providers, providers who only collect and store sensitive banking data, API aggregators, neobanks (as we’ll get into) and so much more, all of which exist as part of this complex and yet somewhat invisible network of banking service providers. 

The uptick in use cases for fintech is why we’re starting to see more of these service providers pop up. In order for a new startup to exist, they need to find ways to expedite start-up timelines, launch costs, and other burdens with starting a financial technology app. It makes no sense for a business to build its own partner bank, software code, and API connections nowadays when that business can tap into a service model and start-up faster and cheaper. 

This is the same reason why we’re starting to see new banking types. Before we really only had traditional banking and credit unions; now we’re starting to see challenger banks and banks that only exist online to serve a certain market. By creating niche products or services, these banks can exist at a scalable and affordable rate as well since the level of overarching regulatory compliance needs aren’t as high.

What is Banking as a Service? 

Banking as a service refers to a service model provided by a company that offers banking infrastructure to support that company’s product or service. Essentially if you wanted to start your own bank or provide banking services under your fintech, then you would likely want to use banking as a service infrastructure to start a banking app faster and more affordably. These service providers connect an emerging fintech company with good banking relationships, existing financial technology, partnerships, and data storage solutions so that fintech can easily resell this for its consumer base. 

A similar offering exists for payment as a service, and often these two services overlap. Payment as a service is the same type of structure but offers different features. 

As you can see from the non-exhaustive list of features below, these two service model types overlap sometimes. The biggest difference is that not all payment service providers are banking service providers. One of the crucial factors depends on whether the provider can issue checks.

Payment as a service:

  • Card issuance
  • ACH transactions
  • Credit card processing
  • Virtual accounts
  • Online money transfers
  • Push to card
  • App development
  • Access to APIs for banking apps
  • iACH
  • Instant settlement

A banking as a service or BaaS provider might provide the following banking products: 

  • Bank account opening (savings account and checking account)
  • Virtual accounts
  • Checks
  • Domestic wires
  • International wires
  • A bank relationship
  • ATM withdrawals
  • Online money transfer technology
  • Card issuance (debit card)
  • ACH transactions
  • App development
  • Access to APIs for banking apps
  • Credit card processing

What is NeoBanking? 

Neobanking refers to a financial service like big banks or traditional banks that offer the same services as big banks but only exist online. A neobank is also referred to as a challenger bank. These firms offer banking services, including bank accounts, business banking, credit cards, check writing, wire transfers, and international money transfers typically at lower rates than big banks or to service additional clientele. 

Neobanks are significant because they differ from big banks in their size and location. Neobanks have made a significant impact in Canada, for example, which has the 5 big banks that regulate the banking market. With challenger banks in this environment, more services can be added and consumers are provided more options. 

Neobanking is a bit different in the US, where it is known that hundreds of banks already exist to service a range of clientele. With the rise of banking as a service model and fintech service providers, more neobanks exist to simply service small fintech startups. 

In general, neobanks don’t need to target niche audiences. Really they are very similar to big banks but they operate as an online bank. Often neobanks won’t have physical bank branches. This means that the services that they do offer are pretty much online or in-app.

Fintech banks aren’t always technology banks (but this is not universal). As mentioned, they can charge fewer fees and be more available and accessible to startups, but this also means that their banking license is different. They can charge less because they offer less and don’t have to pay more in compliance to stay operational.

Banking as a Service vs. Neo Banking

While both service models contribute to open banking, banking as a service and neo banking at its core are two different things. You might build a neo bank or challenger bank using banking as a service service provider. But the banking as a service model is really the underlying infrastructure that supports banking features and financial service providers. And both contribute to the digital banking ecosystem.

Neobanks don’t include just anyone who offers certain banking services but must also operate as a bank (rather than having a different mission). 

Also, note that neo banking is B2C (business to customer), and banking as a service is B2B (business to business).

Another simple way to look at it is that banking as a service provides API connections that help to build a mobile banking app. Comparatively, neobanks might offer a mobile banking app or online banking service to customers ready to go. In essence, banking as a service can build the financial product(s) a neo bank wants to offer.

Is Neobanking Banking as a Service?

It’s also important to note that neobanking isn’t banking as a service, but it may be built off of it. Neobanks will want to service their banking customers, which are looking for banking services. They would typically split and create a new company that would offer banking infrastructure as a service if that’s what they want to do, but they don’t typically provide both to the same consumer.

Ready to Get Started With Banking or Payments as a Service?

Here at Sila, we provide other businesses with a fintech solution as a service. Most of our services are classified as payment as a service, but we can get you started with almost all banking as a service products. From setting up a virtual account to ACH transactions, you may be surprised at what you can do with payment s a service. 

Reach out to the team at Sila to get started today.