THE BANKING-AS-A-SERVICE BANK
This market was established to help new, smaller and niche Fintechs quickly gain ‘go to market’ banking capabilities without heavy capital expenditure and protracted licencing processes.
It combines a modern banking technology stack with a banking licence (requiring compliance with local banking regulations that allows it to intermediate funds and have a banking balance sheet). Some providers specialise in the banking technology stack, known as Software as a Service (SaaS), which integrates using APIs that fulfil the back-end functions of a bank. It is usually sold on a subscription or pay-per-use/API call basis.
A BaaS solution rarely provides the front-end components that interact with the customer, as this is actually the Fintech’s unique selling proposition.
A BaaS provider will provide the business process layer, the core banking system that supports it, and the banking licence and banking balance sheet. Here we illustrate a typical BaaS banking technology stack.
The Banking-As-A-Service Bank characteristics
| Banking as a Service | Characteristics |
| Target customers | Fintechs without a banking licence or eMoney licence; Ecommerce digital consumer companies; Third-party financial services providers payment providers, fully digital banks without a licence. |
| Services | Cloud-based core banking system; Payment system integration; Full banking licence; Banking balance sheet. |
| Value proposition | Fast and cheap go to market options without significant capital expenditure; Licence process is already completed; Lowers barriers to entry for clients e.g. capital and compliance; Full suite of customisable products with white label solutions for core banking, cards, payments, consumer lending, SME lending, regulatory compliance via APIs; Low-cost, ongoing compliance. |
| Revenue Model | Monthly fee for using the white-label solution; Pay per use on API calls; Product revenue share; Risk underwriting. |
| Business logic | Specialises in technology and regulation; Builds a technology stack and regulatory compliance processes rather than becoming a bank; Achieves economies of scale by commoditising parts of the banking value chain; Quick-fix solution gets Fintech client going in the market; Likely market growth as new entities enter the market (partially driven by initiative such as open banking and incumbents who need to digitise. |
| Dependencies | Must acquire and maintain a full banking licence; Must be able to integrate technology solutions by third-parties (middle layer between B2B and B2C fintechs) through APIs. |
Financial Models
You will notice from the above summaries that some models have a high dependency on debit card interchange fees and packaged accounts, both of which may not be sustainable revenue streams.
Many Fintechs, even those that have been in operation for five years or more, are yet to make or sustain a profit, and their growth is fuelled by venture capital funding.
The financial models of many banking Fintechs depends on debit card interchange as their prime source of revenue. This is the fee that card schemes (such as Visa, Mastercard, Amex, JCB and UnionPay) pay to the issuing bank as a percentage of every transaction using the card. It varies between 0.2 per cent in Europe and 2.0 per cent elsewhere, including the US. It offsets some of the bank’s card issuing cost and fraud.
Interchange from card transactions offered banking Fintechs a quick and simple way of getting revenue without charging customers for banking, particularly during their rapid growth period when they are typically funded by venture capital money and are rarely profitable.
While all banks that issue debit cards receive the fee, Fintechs rarely charge the transaction fee for overseas payments using the debit card, depriving them of fees that traditional banks receive.
To provide revenue, banking Fintechs increasingly offer packaged accounts that charge a monthly fee. These packages offer holographic or metal cards, travel insurance, and device insurance. They also offer insurance and other rewards for purchases bought using the card.
Lending usually provides banking Fintechs with a long-term revenue stream although, despite the widespread use of risk algorithms, lending requires bankers rather than technologists.