Platforms that link an API to third parties to enable the use of banking services are referred to as Banking-as-a-Service, or BaaS. Payments, FX, accounts, and more recently Open Banking capabilities such as payment initiation and account information services are examples of these banking services.
What is an API?
Simply put, an API is a system that connects two programs. It enables them to communicate with one another. This is perhaps the most effective, safe, and adaptable tool for companies to acquire and create financial products for their own consumers.
BaaS: benefits for banks
As technology develops rapidly and fintech companies emerge, banks must remain competitive to remain relevant. Banks must extend the latest digital technologies and redefine their delivery model to provide the best customer service. It is not enough to reach out to the public with basic banking services. Fintech firms will be able to consolidate their position in the future of finance if banks support innovation and collaborate with other technology firms.
The competitive advantage
Fintech (financial technology) involves using the latest technology in order to make financial activities more efficient. A fintech company fills a market gap and offers better customer experiences, so they pose a threat to legacy banks (traditional banks). Third-party providers can offer Banking as a Service to legacy banks in order to stay competitive.
Increasing customer base
Banking services, such as opening an account, depositing money, etc., are typically reserved for the general public and businesses. Banks, on the other hand, can profit from extending their clientele and supplying the underlying infrastructure upon which the new enterprises might build in a competitive market where fintech exists. Banks can capture multiple various customers by delivering banking-as-a-service, ex: third-party providers such as payment service providers, and turn them into bank customers.
A new revenue stream
Third-party providers can gain entry to a bank’s fundamental infrastructure through BaaS. These third-party suppliers white label the banks’ services and sell them as their own to end consumers. Service charges and micro-transaction fees are the bank’s main sources of income. Customers can also spend a fee to use the BaaS platform, which is yet another income stream that is expected to increase in the future.
While legacy banks are vital, they typically fail to stay competitive in digital developments, creating a gap for other institutions to fill. Banking-as-a-service is an excellent approach for banks to join the technological revolution in addition to emerging fintech firms. These new technology breakthroughs are making a significant difference in terms of improving experiences and, as a result, consumer satisfaction.
Banking-as-a-service is a new technology that allows banks to obtain a competitive edge, increasing income by white-labelling their services using APIs. Payments through OpenPayd can be made within your own product ecosystems and products without requiring additional infrastructure or licenses.