The term of inclusivity has been an effective concept in the finance industry since the stakeholders aim to offer as many and various services to their customers in order to keep them in their portfolio and prevent them switching into other platforms or products to benefit from other services. As a result of this trend, a bidirectional movement of exchanging services and products has started among the different players of the financial industry. While the traditional banks have started to adapt themselves into the technological enhancements and to adopt the technological solutions provided by the fintech and other financial service vendors, the non-financial companies have given more attention to implanting banking services and products into their system. Banking as a Service (BaaS) emerged as a reformative financial concept to define the phenomenon of third-party distributors providing banking products and services to their customers.

BaaS offers inclusivity to the businesses in different industries because it simply helps them improve the customer experience by integrating financial services into their products. Benefitting from the digitally interconnected nature of the new global financial organization, BaaS saves the customers the toil to move between different mediums for the management of their financial activities. Another trend in the financial service industry is the simplification as customers tend to prefer the financial products and services that are both easy and fast to access. Banking as a Service (BaaS) also covers this need in the industry by providing an easily accessible, embedded and inclusive system.

With using BaaS, financial institutions, regardless of their size, are able to improve customer loyalty, satisfy the demands related to company payments and strengthen their position in the future of the banking industry. On the other hand, traditional banks and credit unions are holding a powerful stance with their competency on BaaS as they are capable of offering agility, trustworthiness, regional expertise and exclusive customer relationships. With BaaS, financial institutions are able to meet the changing customer expectations for smooth integration of financial services into their preferred apps and platforms.

What are the Banking as a Service (BaaS) Trends?

As Banking as a Service (BaaS) is increasing its popularity among various businesses and in the financial industry, new trends are emerging around the concept. Below, there are listed 5 of the most prominent BaaS trends that dominate the financial industry:

1. Emergence of Banking as a Service Platform Vendors: The integration of fintechs and banks can be challenging and complex in terms of the technological and operational workload. To be able to meet the technological and infrastructural needs and demands of fintech providers, small banks usually decide to get the support of a BaaS platform vendor.
2. Banks Forming Their Own BaaS Divisions:  Some banks have started to create in-house BaaS divisions supported by their own technological system to make the collaboration with fintech as direct as possible. The aim is to function as a BaaS from A to Z.
3. BaaS Platform Vendors Transforming into or Acquiring Banks: Several BaaS platform vendors have received their own banking licenses to function as complete providers themselves. It is important to note that not all those vendors are enthusiastic about working on the balance sheets and income statements, but they are more into reinforcing the securitization so that they can lend the resources or risks to the investors. There are also some BaaS vendors buying banks or being created after acquiring banks.
4. The Need to Ensure Compliance within the BaaS Partnerships:  Banks and the BaaS platform vendors are both responsible for making sure that they implement necessary technological systems and procedures to oversee the activities and operations of the fintech companies they partner with. Since the banks are entitled to complying with the regulations, ensuring that their collaborators act within the boundaries of compliance requirements including applying necessary due diligence processes for customer onboarding and monitoring transactions to prevent fraud and money laundering crimes. As the partnerships between banks and the fintech companies continue increasing within the framework of BaaS, the attention of the regulators has been growing with them. Also, open banking regulations that require banks to disclose their data and infrastructure to the third parties for encouraging cooperation and improvement helped many businesses benefit from BaaS to offer more advanced services to their customers. The recent focus, actions and requirements of the regulatory landscape demonstrate that the fintech partners of the banks need to improve their due diligence and risk monitoring and management activities to guarantee fully compliant partnership operations.
5. BaaS Accelerated the Digital Transformation of the Financial Industry: The trend of embedding financial services into other platforms to offer more user-friendly solutions in a single platform has played a strategic role in speeding up the digital transformation of the financial industry. It also created a competitive financial atmosphere in such a way that the banks started to look for new, innovative and inclusive ways to offer new valuable services to their customers.

The bank-fintech collaborations are taking various approaches as the expectations of the digitally-savvy consumers have been changing with the agility, speed and security demands in one place. While several banks prefer to partner with BaaS platform vendors to facilitate the fintech adaptations, others opt for the option of building an in-house BaaS division. The most challenging and vital issue for all the approaches in this BaaS trend is compliance. The financial institutions need to draw up a strategy that puts efficient due diligence processes and risk management activities at the center to ensure their fintech partners take secure and regulatory compliant actions in their operations.

Necati Yavaş, Sales & Business Development Director