Open banking has given way to Banking as a Service, which is revolutionizing the banking industry in India.

This may seem like a bold claim. However, industry developments like the rapid growth of neobanks and numerous customer-centric banking solutions justify it just the same.

This increasing need for customer-centric solutions has led to a rise in demand for Banking as a Service.

In simple terms, Banking as a Service (BaaS) allows non-bank entities (like account aggregators, neobank and fintech players) to tap into the banking ecosystem through APIs.

Thereafter, they can innovate and build sachetized financial products and services on top of the banking infrastructure.

BaaS has led to a reimagining of financial products and services, and a change in the role of each player in the ecosystem.

It has also resulted in many players entering the market.

In fact, BaaS has been touted as the next big transformation frontier for neobanks, insurance providers, and other fintech companies. It enables them to attract greater volumes of customers at lower costs. Moreover, it allows non-banks to offer core financial services to their customers by integrating with banks via APIs, without the hassle of getting a bank license.

Interestingly, the global Banking-as-a-Service (BaaS) market size was valued at USD 2.5 Bn in 2020. It is estimated to grow with a CAGR of 15.7% and reach USD 12.2 Bn by 2031.

But what has led to this increase in the demand for Banking as a Service solutions?

Putting Customers at The Center: Why BaaS is All The Rage

Banking as a Service focuses on fulfilling customer expectations and eliminating their pain points.

Today, most banking customers are ‘digital natives’. They are frequent users of products created by tech-first organizations like Amazon, Uber and Google.

Resultantly, they have come to expect instant gratification. As the banking industry has moved online, they expect their banks and other fintechs to deliver similar customer-centric services.

Here is another important aspect to take into consideration:

Previously, banks functioned as ‘super apps.’ They provided every banking service under the sun through the same institution. This includes financial services like savings, wealth, mutual funds, insurance and more.

Moreover, financial literacy in the Indian masses has increased, so have their expectations. However, traditional banks, with their monolith and outdated legacy systems could not keep up.

This is where Banking as a Service filled the gap. 

It allowed fintech players to tap into the banking infrastructure and offer personalized sachetized banking solutions to the Indian masses.

While the end consumer comes out as the clear winner, BaaS has a huge value proposition for all the players involved.

Advantages For Banking as a Service: Fulfilling The Gap in The Market

Unbundling of banking services is beneficial to customers, banks, and fintech players alike.

1) BaaS Advantages for Customers
For starters, unbundling of banking services declutters banking services. This leads to frequent usage and opens space for higher personalization

Moreover, new players in the market fuel healthy competition in the fintech space. This encourages innovations in the fintech space.

As a result, these products make way for higher customer satisfaction.

Furthermore, experts believe that BaaS can help democratize financial services for the Indian population.

For instance, a fintech player propelled by BaaS may provide a product that is tailored for the unbanked sector. It may have an easy-to-use interface for the under-literate sector and be personalized for local languages.

2) BaaS Advantages for Banks

Banking as a Service allows traditional banks to share data with third parties through APIs. This opens new revenue streams for them.

Here are some value propositions for traditional institutions:

1. Access to a new pool of loyal customers through partnerships

2. Monetize the data that they expose to third parties

3. Commoditizing account services

4. Enabling service fees or per-transaction fees in case of card issuance or account services

5. Market penetration in underbanked or unbanked areas/localities

6. Revenue sharing/ per-API call models

Apart from that, BaaS allows traditional banks to access the new innovations and technologies coined by fintech players.

Speaking of which, here’s how BaaS aids fintech and non-bank market players

3) BaaS Advantages for Fintech Players

First and foremost, Banking as a Service enables faster Go-To-Market for fintech players.

Indian banking regulation mandates restricted third-party access to customer information.

For the most part, offering banking services requires a licence. However, that requires enormous amounts of resources and capital.

BaaS enables fintech players to tap into already-existing banking infrastructure. This allows them to focus on their primary product offering instead of pursuing the hassle of getting (and maintaining) a licence. This also propels innovations and rapid developments of banking services.

Finally, BaaS also allows fintech players to leverage customer trust associated with traditional banks.

Even though many banks are building BaaS offerings, businesses prefer to tie up with third-party BaaS providers.

The advantages of tying up with the latter are numerous. Starting from easy integrations with numerous banks to faster turn-around-time.

BaaS Platforms: Innovations Due To Unbundling of Financial Services

Banking as a Service brings a formidable value proposition for banks and third party players alike.

In fact, unbundling of financial services opens doors to some interesting innovations.

Here are some examples.

Issuing as a Service Intermediaries

Account aggregators or third party players can access transaction data for new-age credit scoring and underwriting. It can also provide insight into user analytics.

Accounts by Cashfree Payments is an example of the same. It enables end customers to open accounts, link accounts, accept deposits, make payouts, check balance and earn interest.

Lending Aggregators

Buy Now Pay Later (BNPL) is quite the buzzword today.

Simplifying financial services aided eCommerce merchants to enable instant BNPL facilities.

Another use case is food aggregators offering B2B lending for restaurants.

Payments and Retail Banking Products

New-age payment intermediaries can act as BaaS platforms as well.

For instance, HR tech platforms may offer integrated salary payout facility.

Alternatively, fintech infrastructure intermediaries may facilitate API based integration with currency conversion, cross-border intermediaries, etc.

Neobanks may help offer retail banking products with the help of BaaS platforms. Some use cases would be insurance and investment. SME banking services with payment collection, current accounts, overdraft, treasury are also prevalent.

The Future of BaaS

Apart from the use-cases above, BaaS platforms may also target micro-segments. This can be a leap in efforts towards financial inclusion.

The BaaS market in the last 5 years has grown by a CAGR of 11.8%.

As new market players enter, financial inclusion may get a much-needed boost as well. Moreover, it will be interesting to see the innovations heralded by these bank-fintech partnerships.

Moneycontrol journalists were not involved in the creation of the article