Here’s Everything You Need To Know About Banking-as-a-Service

What Is Banking-as-a-Service (BaaS)?

Banking-as-a-Service (BaaS) is a financial technology that allows non-banking financial companies (NBFCs) to offer banking services to their customers. By leveraging APIs, NBFCs can offer banking services like payments, loans or even bank accounts, all under their in-house brand. On one hand, Banks gain access to a wider customer base, while NBFCs can attract more customers by providing these financial services.

How Does Banking-as-a-Service Work?

Banking-as-a-Service (BaaS) in India thrives on collaboration between traditional banks and fintech companies but operates within a specific regulatory framework. The following gives a breakdown of how this works:

The Players

• Banks: They provide the core banking infrastructure, licences and regulatory compliance. They also develop and manage the APIs that allow access to their services.
• Fintech Companies: These non-bank entities leverage BaaS to offer financial services within their platforms or applications.
• Regulators: The Reserve Bank of India (RBI) is the primary regulator overseeing BaaS partnerships.

The Process

• Partnership Formation: Banks and fintech companies establish a formal agreement outlining roles, responsibilities and data security protocols. The RBI’s guidelines for outsourcing financial services (the Master Direction on Outsourcing of Information Technology Services, 2023) are followed to ensure compliance.
• API Integration: Banks provide fintech companies with secure APIs that grant access to banking functionalities like account opening, payment processing or loan applications.
• Fintech Platform Integration: Fintech companies integrate these APIs into their platforms, allowing users to access and utilise banking services. They ensure their platforms comply with Know Your Customer (KYC) and Prevention of Money Laundering Act (PMLA) regulations set by the RBI.
• Customer Onboarding: The fintech company onboards customers and performs due diligence following KYC and AML regulations. This might involve verification processes set by the bank as well.
• Service Delivery: Customers use the fintech platform to access banking services. Transactions and data flow securely through the fintech platform and the bank’s systems through the APIs.

All of this is made possible within certain regulatory considerations

• Data Security: RBI regulations mandate robust data security practices from banks and fintech companies. They must ensure customer data privacy and implement measures to prevent breaches.
• Consumer Protection: The RBI prioritises consumer protection. Fintech companies must be transparent about fees, terms & conditions, and ensure customer grievances are addressed effectively.
• Compliance: Both banks and fintech companies are responsible for adhering to all relevant regulations set by the RBI, including those related to KYC, AML and cybersecurity.

What Are The Potential Use Cases Of Banking-as-a-Service?

Banking-as-a-Service (BaaS) unlocks several possibilities for NBFCs beyond traditional banking institutions. The following are potential use cases that are leveraging BaaS:

• Enhanced Ecommerce Experiences: BaaS allows ecommerce companies to integrate loan application processes from partner banks, making it easier for customers to secure financing and complete transactions. This is already happening in India with several ecommerce companies integrating Buy Now Pay Later (BNPL) within their payment workflows.
• Fintech Innovation: Fintech startups can leverage BaaS to offer innovative financial products and services. This could include AI-based advisors for investing, mobile wallets with integrated budgeting tools, or enterprise expense management solutions.
• Streamlined SME Banking: SMEs can benefit from BaaS by gaining access to faster and easier account opening, streamlined invoicing and payment processing, or simplified access to business loans.
• Next-Gen Banking Solutions: Traditional banks can utilise BaaS to offer their next-generation banking solutions. This could involve launching digital wallets or mobile banking apps with enhanced features and functionalities.
• Reaching Underserved Populations: BaaS can be a powerful tool for financial inclusion. By partnering with non-traditional financial institutions like microfinance organisations, banks can extend financial services to those needing access to traditional banking channels.

What Are The Advantages & Disadvantages of Banking-as-a-Service?

Banking-as-a-Service (BaaS) offers a wave of opportunity for both banks and NBFCs, but it also presents some challenges worth consideration:

Advantages

• Increased Innovation: BaaS fosters collaboration between banks and fintech companies, leading to more innovative financial products and services. This benefits consumers with a wider range of options and potentially better user experiences.
• Enhanced Customer Experience: Businesses can leverage BaaS to integrate financial services seamlessly into their existing platforms. This creates a more convenient experience for customers and strengthens brand loyalty.
• Financial Inclusion: BaaS allows non-traditional financial institutions to reach underserved populations by offering financial services through familiar platforms. This can promote financial inclusion for those who might not have access to traditional banking channels.
• Faster Time-to-Market: Fintech companies can leverage BaaS to launch new financial products and services much faster than if they had to build their infrastructure. This agility allows them to capitalise on market opportunities quickly.
• Reduced Costs: For banks and NBFCs, BaaS can translate to cost savings. Banks can reach new customer segments without extensive branch networks, while NBFCs can gain access to financial services without hefty investments.

Disadvantages

• Regulatory Uncertainty: The regulatory landscape surrounding BaaS is still evolving in many regions. This uncertainty can create challenges for both banks and fintech companies in compliance. (This is particularly relevant in India, as discussed earlier).
• Security Concerns: Integrating financial services with third-party platforms raises concerns about data security and potential vulnerabilities. Robust security measures are crucial to protect customer data and prevent financial crimes.
• Vendor Lock-In: NBFCs relying on a single BaaS provider might become locked into their platform and pricing structures. Careful selection of a BaaS provider with a good reputation and flexible solutions is important.
• Limited Functionality: BaaS offerings might not provide the full spectrum of traditional banking services. NBFCs need to assess their specific needs and ensure the BaaS provider can deliver the required functionalities.
• Reliance on Partner Performance: The success of a BaaS partnership depends on the performance of both parties involved. Technical glitches or operational issues at the bank or fintech company can impact customer experience.

What Are Some Indian Banking-as-a-Service Startups?

Globally, the BaaS market is expected to reach $11.6 Bn by 2028 from an estimated $4.4 Bn in 2023, growing at a CAGR of 26.60%, according to a report by Mordor Intelligence. This augurs well for Indian BaaS startups such as OneStack, Setu and Zeta, who have already created a paradigm shift, meeting end-to-end customer requirements and improving customer experience.

India has one of the world’s largest underbanked populations, and with financial inclusion at the heart of India’s banking sector’s transformation, BaaS is set to play a pivotal role in banking hundreds of millions of underserved Indians.