Bank as a Service and Open Banking Models Explained

The inevitable change of the banking sector is now a fact with the emergence of new banking models and the fast development of financial technologies. With that, the market is getting flooded with a lot of new buzz words like Bank as a Service, Open Banking and neobanks, just to name a few.

The rapid progress of the new banking structures and financial products makes it almost impossible to keep up with the new terminology. That’s why we looked into the two most attractive banking models, allowing companies to offer financial products without being an actual bank.

What Is Bank as a Service (BaaS)?

Bank as a Service is a model that allows companies from various industries to integrate banking services and products into their own without obtaining a banking license. To do that, the company communicates with the partner bank via APIs (Application Programming Interfaces) and, in this way, is becoming an intermediary between the bank and the end customer.

Just with few lines of code, businesses can start offering financial services to their customers such as card issuing, payments processing, currency exchange, digital wallets, lending and many more. The convenience of adding these services to the company’s portfolio opens a whole new world of opportunities for growth and perfecting the user experience.

Furthermore, Bank as a Service is a great way for non-EU companies to enter the EU market without applying for a banking license. The BaaS model is also considered the basis for the establishment of digital banks or the so-called neobanks.

While the BaaS disruption leads to innovation and new product development, there are few things to be considered. Offering advanced financial services comes with more technical questions and support requests from the customers. Therefore, companies should ensure appropriate customer support to maintain customer satisfaction.

How does Bank as a Service differ from traditional banking?

Unlike traditional banks, which require a banking license and are heavily regulated, BaaS providers need to meet minimum regulatory requirements and do not need a banking license. However, the lack of a license can lead to trust issues which makes it harder for companies to attract new customers.

As mentioned above, implementing the BaaS model gives companies higher flexibility when it comes to product development. Тhey can start creating and experimenting with new product offerings with just a talented developer and an imaginative product manager.

On the other hand, banks rely heavily on their internal network of accounts and need to fulfil a lot of legal requirements before launching a new product on the market. This leads us to the next difference – the customer experience.

In this area, both traditional banking and the BaaS model have their pros and cons. As banks are specialised financial institutions, they have the needed specialists to answer technical customer queries. In contrast, BaaS providers may need to hire external specialists for financial customer support.

Speaking of convenience, BaaS providers have the edge over banks here. The banks’ cumbersome structure and the lack of digitalization of their products make them harder to reach and less attractive to the tech-savvy younger generations.

What Is Open Banking?

Even though, both BaaS and Open Banking allow non-bank companies to access banking data, there is a difference between the two models.

Open Banking allows third parties to access customer data directly from the partner bank via an API (Application Programming Interface). This allows companies to automate their onboarding processes, perform credit scoring and rating, generate custom loyalty programs, and provide their customers with financial dashboards to manage and analyse their accounts.

While companies can offer various banking products with the Bank as a Service model, the most advanced financial service that Open Banking offers is the one-off payment. One-off payments are defined as non-recurring payments between the company and the customer.

It is important to note that Open Banking does not allow businesses to take deposits or lend money, as they need a banking licence to offer these services. However, as technologies and legislations are constantly changing, there are upcoming use cases for Open Banking, such as instant account top-up and instant bank payments.

Advantages of Offering Banking Services

Financial technologies and new banking models open the doors to a whole new customer segment for non-bank companies. By diversifying their product portfolio, companies can increase both their competitiveness and profitability. Of course, they should keep in mind that customers today expect a flawless experience, fast service, high-quality products and value for money.

Fortunately, SEPA Cyber Technologies can help you achieve all of this and has the right experts to guide you on the path to a successful digital transformation.