The banking and fintech industry is ever-growing and expanding. Through the digital transformation, more businesses can grow a fintech startup from scratch to provide new banking and payments services to people worldwide.
In this industry, there are new product types and models to use. Banking as a service (BaaS) is one of them, along with payment as a service (PaaS).
You may be wondering what these are and if they are right for your business. Read on to find out:
What is BaaS or Banking as a Service?
Banking as a service is the use of banking services by other businesses to provide banking products to customers. For example, a business may hire a banking as a service (BaaS) provider and pay a regular amount monthly or yearly to gain access to the BaaS provider’s code, technology, or banking products to resell them through an additional product.
Companies like Sila operate in this way (although we align more with the payments as a service business model). Essentially, a business would be able to hire a BaaS service provider to white label the back-end code and to resell those products. It also gives the reseller the opportunity to customer financial features to make new products.
There is a clear benefit to BaaS. For most startups, the biggest benefit is the cost savings. To provide banking services, you often need to be classified as a bank or bank agent. Getting this classification is costly and time-consuming. When you go with a BaaS service provider, you don’t have to pay as much or commit to months of certification and processes.
Another benefit is access to products. BaaS service providers have products like bank accounts, checks and checkbooks, wire transfers, loans, and mortgages, which in turn allow users to create more products. These products provide spending power and a high volume of funds flow to clientele and can be difficult for even registered bank agents to gain access to. Therefore, using a BaaS provider helps you get to these products faster and provide them for your client.
How Does BaaS Compare to PaaS or Payments as a Service
BaaS compares to payments as a service, which is a similar model for business-to-business service providers but they offer different services. Businesses would still gain the same benefits as BaaS, but they will access different products.
PaaS products are all about payments. This includes sending and receiving money, ACH transfers, wire transfers, international money transfers, gaining access to digital banking wallets, and financial automation. While BaaS providers might also be able to provide payments, this often does not go the other way.
To compare, both BaaS and PaaS might provide
- The ability to create a digital app with these products
- Access to a banking partner with less cost and overhead
- Compliance support
- Embedded finance
- Access to a banking vendor or partner
- Access to banking license authorization (via another bank)
Unique BaaS products are more like:
- Banking products, like checks, wire transfers, checking accounts, savings accounts, full FDIC-insurance accounts, loan origination, mortgage, credit financing.
And unique PaaS might include:
- Payment products, like automated money transfers, ACH credits, ACH debits, wire transfers, card issuance, e-commerce integration, digital wallets, financial automation with smart contract technology, and embedded compliance like Know Your Customer (KYC) and Know Your Business (KYB).
When Should I use BaaS vs. PaaS?
As you can see, there are many use case examples of when you want to use BaaS vs. PaaS.
If you want to get into financial services, then understanding the difference between service BaaS and a PaaS platform is key.
A BaaS solution is great for:
- Fintech companies who want to provide digital banking services
- Creating a digital bank or digital financial institution
- Gaining access to ODFI/RDFI status in the United States for Automated Clearing House (ACH) money transfers
- Facilitating car loans, mortgages, refinancing, and private student loans
- Digitizing a traditional bank with less overhead
- Gaining access to an already created digital banking product
- Tapping into the regulatory compliance features that BaaS providers might provide
On the other hand, a PaaS solution is great for:
- Fintech startups who want to create a financial product but want to do with less time and overhead
- Facilitating payment transactions, like ACH money transactions, international money transfers, business to business and peer to peer money transfers, push to card, and wire transfers
- Getting access to the building materials for an embedded financial product with compliance features, real time payments, digital wallets, and financial automation
- Finding a bank partner is far easier than if you would do it on your own
- Gaining access to data protection for offloading some compliance
- Expanding your financial service offerings even as a nonbank entity
- Open banking, as it often grants more users access to financial firepower even when other limitations might apply
- Businesses who want to expand the product offerings in fields like debt servicing, real estate transactions, international money transfers, and more.
As you can see, these two business models are vastly different.
If you want to create a payments mobile app, integrate e-commerce payments into your website, or facilitate card or point of sale transactions, then you’re most likely looking for a PaaS provider. However, if you’d like to provide banking services, then you should look to the BaaS platform.
Getting Started With Sila
No matter which route you decide, Sila is by your side. We can help you navigate the financial industry as a fintech startup. You may be surprised just at how much you can do with Sila. We offer lots of payment products and some banking services too.
Reach out to our sales team or start building in the sandbox today!