What Is Banking as a Service?

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DEFINITION

Banking as a service is a model that allows companies to offer financial products and services to their customers by partnering with a licensed bank. Utilizing this strategy gives non-bank businesses the ability to incorporate digital banking services directly into their own products.

Definition and Example of Banking as a Service

Banking as a service (BaaS) describes a strategy in which fintech companies or other non-bank businesses partner with traditional banks to provide you with banking services such as checking and savings accounts, all in one integrated platform that becomes a single destination for your banking needs.

One example of a non-bank business providing banking as a service would be an airline that offers credit cards under its own brand, such as Southwest Airlines’ Southwest Rapid Rewards Priority Visa Card. Another example of banking as a service would be Chime, an online banking platform that provides checking and savings accounts via the Bancorp Bank and Stride Bank.

How Banking as a Service Works

In traditional banking, a banking license is required as is following strict government regulations. However, a banking-as-a-service partnership means that companies can seamlessly integrate financial services directly into their existing platforms while avoiding the hassle of government rules and licensing that starting a bank would require.

Banking as a service works when a third-party provider (TPP) such as a fintech company, digital bank, or other non-bank business pays a licensed bank a fee to access the bank's systems and tools. Typically, the TPP pays a monthly or annual fee. However, special arrangements can be made based on the type of service or group of services the business wants to utilize from the bank and incorporate into its existing platform.

You’ll find that many online-only banking services are actually fintech companies that offer banking as a service. One way to determine if a banking platform uses BaaS is to scroll to the bottom of the banking platform’s home page and look for a statement like, “Banking services provided by… .”

Licensed banks then open up their data and technology to the business. This allows the company to access the necessary tools that will enable it to begin delivering online financial services to you through the company’s website instead of the bank’s website. After integrating with the licensed bank, a company can provide you with services such as checking and savings accounts, paying bills, account transfers, account management, credit card, and online lending services.

By aligning with the established and licensed banks, nonbank businesses or third-party providers are positioned to create new products and services in addition to their regular business services. For instance, an airline company that begins offering their own credit card is offering a new product to its customers via banking as a service.

Money deposited into a bank’s checking or savings account through BaaS is protected by the bank’s Federal Insurance Deposit Corporation’s $250,000 insurance.

The ever-increasing number of fintech companies and online banking platforms that use BaaS has been a game-changer in the banking industry. Moving into the banking-as-a-service space helps traditional banks stay in the game by turning a looming threat into a booming opportunity.

To see banking as a service in action, consider the bank account and debit card that Lyft offers to its drivers. There are no maintenance or low-balance fees. In addition, drivers get paid instantly and can access their accounts directly through Lyft’s app or website.

To offer these services, Lyft entered a BaaS partnership with Stride Bank. Stride handles all the back-end transactions such as providing the debit card, managing the money flow through the driver’s account, and maintaining regulatory requirements. Yet on the front end, the drivers handle their banking activities via Lyft’s website or mobile app and have virtually no interaction with Stride bank.

Pros and Cons of Banking as a Service

Pros
  • Banks can expand their reach

  • Banks can stay relevant

  • Companies can offer banking services

  • More choices for consumers

Cons
  • Competition may cut into banks’ customer bases

  • Usually no one-on-one relationships

  • Information is less secure

Pros Explained

  • Banks can expand their reach: Banks can partner with like-minded businesses that help banks expand their reach while simultaneously keeping up with your needs.
  • Banks can stay relevant: Banks can use BaaS to remain relevant in an ever-changing digital landscape.
  • Companies can offer banking services: Non-bank businesses enjoy all the advantages of accessing banking processes to offer a wide array of services to you, instead of creating their own processes.
  • More choices for consumers: As a customer, you benefit by having greater choices of how and where you conduct financial transactions. Additionally, more competition means , in theory, more savings for you.

Cons Explained

  • Competition may cut into banks’ customer bases: For banks, BaaS means they’re facing the constant danger of losing some of their market share to non-banks with better services.
  • Usually no one-on-one relationships: If you prefer digital banking but also want face-to-face interaction with your financial institution, you typically won’t get it with BaaS accounts.
  • Your information is less secure: Because you’re using two companies for your banking (the company offering the account and the bank), your information is exposed two ways instead of one.

Key Takeaways

  • Banking as a service is a model that allows virtually any business to offer financial products and services to their customers by partnering with a licensed bank.
  • Businesses pay a fee to banks for access to bank systems and functionalities.
  • Businesses are able to integrate financial services technology into their existing products and services.
  • Customers can perform banking activities through the website or a mobile app of a non-bank business they know and trust without going through a bank.
  • Banking as a service provides more banking options for consumers.

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Article Sources

  1. Board of Governors of the Federal Reserve System. “How Can I Start a Bank?

  2. Sunrise Banks. “What Is Banking as a Service?

  3. Chime. “Banking With No Hidden Fees and Fee Free Overdraft.”

  4. Lyft. “The Lyft Direct Debit Card for Drivers.”