Over 40% of consumers now prefer online channels for financing major purchases, like cars. This shift points to a larger trend: younger generations, particularly Gen Z, are moving away from traditional bank visits in favor of digital-first solutions powered by Banking as a Service (BaaS).
This generation demands for advanced financial services that align with their tech-savvy lifestyles — enhanced identity and credit protection, robust data security, automated financial guidance. Traditional banking methods often fall short of these expectations, creating a gap that needs to be addressed.
In this context, BaaS bridges the gap. It seamlessly integrates banking and financial services in your day-to-day apps, changing the way we shop.
In this guide, we’ll explore how BaaS and embedded banking are revolutionizing the banking experience for businesses and end users alike.
BaaS, Explained
BaaS enables companies to integrate financial services traditionally offered by banks into their existing platforms. This integration allows Non-Financial Companies (NFCs) to offer banking functions like issuing cards and granting loans directly to their customers.
BaaS products include, but are not limited to:
- Card issuing
- Lending services
- Buy-now-pay-later financing
- Payment processing
- Direct financing options on merchant websites
BaaS providers collaborate with banks to offer services through banking APIs (Application Programming Interfaces — technology that allows different systems to essentially talk to each other).
These APIs allow end users to access banking services via the BaaS platform while still maintaining their relationship with their trusted bank.
The BaaS Value Chain
The BaaS ecosystem consists of four key components:
Configurations of BaaS
Historically, banks owned the entire value chain, from building products to distributing them through their channels (like branches). BaaS, however, focuses on 1-2 parts of this value chain. Based on this, companies can use four strategies to offer their products:
- Providers: NFCs simply provide banking licenses and products.
- Providers-Aggregators: NFCs integrate their services with BaaS providers to offer enhanced solutions.
- Distributor-Aggregator: NFCs combine services from banks and BaaS providers to create unique products.
- Distributor-only: NFCs distribute pre-built financial services tailored to their customer base.
Embedded Payments and Finance
When NFCs use the services of a BaaS provider, it’s called embedded finance.
This concept builds on ‘embedded payments’ — platforms providing services like payment gateways, wire transfers, and ACH access through a payment's provider. The scope is limited to payments only.
A BaaS provider simply enables them to add even more financial services to their platform, boosting their unique selling proposition (USP).
The evolution from embedded payments to embedded finance represents significant growth in the capabilities of non-financial companies — from SaaS 2.0 to SaaS 3.0.
What BaaS is Not
It’s easy to confuse BaaS with open banking, platform banking, neo banking, and FinTech's. However, key differences set them apart.
BaaS vs. Open Banking
Open banking is a system where banks allow NFCs to access customers’ financial information (like transaction history) with customer consent. While both BaaS and open banking use banking APIs, they apply to different aspects of the financial ecosystem:
BaaS vs. Platform Banking
BaaS and platform banking are closely related since both use banking APIs, but there’s an important difference:
BaaS vs. Neobanks
BaaS serves as the foundational layer that powers other companies' financial services, while neobanks are the direct providers of banking services:
BaaS vs. FinTech
BaaS can be a facilitator for FinTechs, helping them deliver financial services without needing to become licensed banks:
How Does BaaS Work?
Let’s take an example of Buy Now, Pay Later (BNPL) offered by Amazon at the point of purchase to understand how BaaS works.
Recently, Amazon started offering BNPL options, which allow customers to purchase items and pay for them in installments over time, typically without interest if paid within a specific period.
To offer this service, Amazon integrated banking services directly into its checkout process. This allows customers to get instant approval for small loans at the point of purchase, without leaving the app or applying for a traditional credit card or loan.
By leveraging Banking as a Service, Amazon seamlessly provides these financial services. Customers can split their purchases into manageable payments, making larger items more affordable, without Amazon having to become a bank itself.
Behind the scenes, BaaS connects Amazon’s platform to a partner bank’s services through APIs. When a customer selects BNPL, the BaaS infrastructure quickly performs credit checks, approves the loan, and sets up the payment schedule — all within seconds during checkout.
Common Use Cases for BaaS
BaaS creates diverse opportunities for businesses by streamlining financial operations, speeding up payments, and enhancing customer financing — all while improving the overall user experience. Here’s how Neokred’s Collectbot ensures this:
- Banking API Integration: Collectbot simplifies banking API integrations for different purposes with comprehensive documentation and support.
- Comprehensive Payment Solutions: Collectbot helps businesses accept payments across multiple channels (cards, net banking, UPI, wallets) without building their own banking infrastructure.
- Virtual Account Numbers (VAN): Businesses can create unique accounts for various functions — such as escrow services, merchant settlements, and KYC verification.
- Advanced Payout Systems: Collectbot handles complex operations like refunds, vendor payments, and reward disbursements, all while providing real-time reporting and analytics.
Plus, Collectbot offers tailored business solutions across different sectors:
- FinTech companies can leverage escrow accounts for P2P transactions
- E-commerce platforms can simplify marketplace seller payouts
- Subscription businesses can manage tiered subscriptions and prorated billing
Benefits of Banking as a Service
BaaS fosters collaboration between banks, NFCs, and customers, creating mutual benefits.
BaaS’ Benefits for Banks
- New Revenue Streams: Banks earn revenue from API transactions and FinTech partnerships.
Cost-Savings: Outsourcing technology reduces development costs and operational expenses.
- Enhanced Customer Insights: Collaboration with NFCs provides data on new customer groups, enabling personalized offers that boost sales as 80% of consumers are more likely to make a purchase when offered personalized experiences.
BaaS’ Benefits for NFCs
- Faster Market Entry: NFCs bypass banking regulations by integrating with BaaS providers, launching financial products faster.
- Increased Customer Trust: Leveraging a bank’s reputation enhances trust and also helps NFCs gain valuable customer insights.
- New Opportunities: NFCs can build new products by using various banking APIs, opening additional revenue streams.
BaaS’ Benefits for Customers
- Improved Experience: Customers enjoy embedded financial services within platforms they already use.
- Personalized Financial Solutions: Niche financial products designed for specific needs.
- More Options: Increased competition leads to a broader range of financial products.
The Rise of BaaS
BaaS is now a $7 trillion industry which has unsurprisingly reshaped financial services. Here are four primary factors driving the rise of BaaS:
Evolving Customer Demand
- An increasing number of customers are seeking integrated, user-friendly financial services that cover their entire financial journey.
- Plus, SMEs find their needs unmet by traditional banks and FinTechs are targeting this segment with tailored solutions.
FinTech Industry Growth
- India’s FinTech adoption rate is 87% (compared to the global average of 64%). Thishigher adoption rate is fueling growth in this space.
- BaaS allows FinTechs to enter the market quickly without having to meet the central bank’s stringent compliance requirements.
Regulatory Environment
- Changes in the regulatory environment have also created a more favorable landscape for BaaS. Many jurisdictions now require banks to make their APIs public, encouraging competition and innovation.
- Banks are also adapting to meet new regulatory requirements and ensure customer satisfaction.
Banking Industry Transformation
- The industry itself is undergoing transformation thanks to shifts towards digital and mobile-first banking solutions.
- Forecasts of declining banking revenue and profitability push banks to seek new income streams through BaaS partnerships.
Neokred and BaaS
As BaaS continues to evolve, it faces several challenges. Traditional banks must overhaul their technology and rethink their role in the financial ecosystem. Organizations also need to develop a well-defined API strategy that balances easy integration and business value with minimal complexity.
One such API is created by Neokred — its innovative BaaS solution, Collectbot, offers a comprehensive suite of banking APIs that enable businesses to seamlessly integrate banking services into their platforms.
Are you ready to transform your business with cutting-edge banking services? Schedule a demo to explore how Collectbot can empower your platform with seamless financial integration.
Conclusion
FAQs
When choosing a BaaS provider, consider factors such as:
- Robust APIs
- Strong security measures
- Regulatory compliance
- Scalability
- Good customer support
It typically takes 3–6 months, depending on the complexity of your product. Simple integrations might take weeks, while full-scale banking services could take up to a year.
A common example is a payment API. It communicates between the processor, gateway, and platform (e-commerce, for example) to make sure your online payment via UPI can go through.
Embedded banking is the end result: financial services integrated into non-financial products. Banking as a Service (BaaS) is the model that enables this integration.
