What is banking as a service and what are its advantages?

This revolution practically fits into two acronyms: BaaS and FaaS. These letters respectively mean banking as a service (or "banca como servicio") and fintech as a service ("fintech como servicio"), which together form a modality of banking services accessible to virtually any type of business. This business model came in full force thanks to fintechs and is increasingly sought after by companies that want to offer their own financial products.

Let's see in this article what BaaS and FaaS are, how these business models work that allow companies to "become a bank" on their own, their practical advantages, and how this market can provide you with good opportunities to diversify and earn profits.

Banking as a service (BaaS): What is it?

Banking as a Service (BaaS) can be considered a technology, a market solution, or a business model with various features. What matters is its purpose: to allow any company, regardless of where it operates, to offer financial products as if it were a bank or financial institution. All of this is achieved through integration with technologies offered by other companies.

This term comes precisely from the idea of offering 'banking' services as an inherent activity. Thanks to new technological solutions (and regulations), businesses that do not operate in the sector can provide products and services that were previously only possible through banks and financial institutions, such as credit and debit cards, as well as digital accounts with their own transfers and payment methods.

This began to happen a few years ago through in-house technologies and, with BaaS, it has become much easier.

BaaS became popular following the growth of fintechs and embedded finance. By mid-2015, the financial industry saw the market open up to develop fully digital financial products, and many people in the sector questioned whether this could expand even further to encompass other segments and industries. With the development of more and more technological solutions, this disruption became a reality in just a few years.

Is BaaS the same as open banking?

Among the many questions when talking about BaaS, the most common is whether it relates to the open banking movement that recently arrived in Latam and has also revolutionized the way financial services are offered to people. The answer to this question, however, is no, they are not the same.

Open banking, also known as open finance, is a process that securely and decentralizedly shares customer information from the financial sector with other regulated financial institutions, based on customer consent. With it, each person can, for example, more easily transfer and contract services.

By sharing your financial habits and using products like cards, loans, and digital accounts, other institutions can better understand your profile and offer their services if they didn't offer them before.

It's worth mentioning that, although they are different concepts, open banking is a solution that can also be offered as part of banking as a service.

Fintech as a service: What is it?

It is also common to talk about fintech as a service, and also finance as a service (both with the acronym FaaS). In practice, some refer to FaaS as technology companies that provide financial solutions like BaaS for businesses in different segments. Meanwhile, others use FaaS as a synonym for BaaS. For example, in Brazil, the expression banking as a service is commonly used in the market.

So, how do BaaS and FaaS work?

As a technological solution, BaaS-software stands out for the ease and practicality with which it can be implemented. All thanks to the well-known APIs (which we've already talked about!) provided by tech companies. These act as a shortcut to connect different programs, applications, and financial solutions within a company's portfolio of services, easily and quickly. And with the great advantage that the integration is completed in a matter of weeks.

For example: you have a business and want to retain your customers by offering a benefit, such as a cashback service or a credit card with perks. These BaaS solutions can be developed by integration through APIs made by an associated developer. A FaaS company provides you with the necessary technological infrastructure of the accounts where your cashback will "trickle," or to manufacture cards alongside market brands.

In summary, these solutions through APIs allow planning the benefits and the business model that will be part of it, while the associated fintech handles all the practical aspects of development and regulation. In practice, with a BaaS-platform you eliminate intermediary banks and start offering customized solutions à la carte, which still give you the control to understand in detail how customers use your financial products.

Practical examples of using BaaS

BaaS is already a reality worldwide, and large companies have already adopted it. In Brazil, for instance, some cases of its adoption to scale businesses are well known:

• There are numerous cases of retail companies offering their own credit and debit cards, with benefits for those who use them and offering discounts at their own stores and websites;
• Digital wallets from appliance stores are among the most popular;
• Delivery apps use cards as a payment method for those who make purchases requested by app users. This way, they avoid the use of cash and simplify the process.
• E-commerce giants offer financial products through digital accounts, with cashback and their own payment and transfer environments.

And BaaS has several other uses and can be applied in different environments, for instance, as support for crypto solutions. Recently, we partnered with Agrotoken so that producers can use their already tokenized agro-commodities to make payments through a physical or digital card.

What is the situation of BaaS in Latam?

Without a doubt, BaaS continues to expand throughout the region. And there are multiple ways to apply it depending on the products companies design for their customers. Additionally, there are increasingly more regulations that allow the development of fintech: Chile has already approved its Fintech Law, which has already led to greater dynamism in its financial market and an explosion of crypto assets.

For example, in the Argentine market, B2B financial services already accounted for 34% of its fintech ecosystem in 2020. BaaS is a clear tool to develop—and integrate companies into—that and many more solutions, such as investments, digital payments, blockchain, and crypto assets:

Advantages of joining banking as a service

There are many advantages that BaaS banking as a service solutions offer non-financial companies to expand their service portfolio. These advantages can be summarized in several points:

• With BaaS, you achieve greater operational efficiency and reduce costs with existing financial services in traditional payment methods.
• Having your own customized financial solutions allows you to reduce intermediaries and increase customer touchpoints and relationships, placing greater focus on attraction, user experience, retention, and loyalty;
• Your company can expand its portfolio and offer multiple services like a bank or financial institution, without having to become a bank, undergo bureaucratic processes, or step away from your core business;
• Exploring benefits such as cashbacks and loyalty programs helps retain your customers, monitor their market behavior, further personalize your solutions, and be more competitive in the marketplace against competitors;
• With cards, digital accounts, payment solutions, and even loans and services that cover interest, you can generate new revenue streams for your business.

Planning is essential to adopting your own BaaS

Opting to implement BaaS solutions is a natural path for those who want to take advantage of the benefits we showcased earlier. But it is important to consider some points:

• It is timely to think about which solutions your users will actually want to add. Cards and accounts can often be the basics they need, but depending on their needs and habits, you can go further and think of more innovative solutions that other players have not yet offered. It is always worthwhile to consider the base you already have and which planned solutions will be suitable for the clients and, consequently, for your company;
• Strategic partnership planning to save time with quick and effective integration through APIs is always a best practice that saves time and money and generates higher returns;
• In the realm of finance as a service, you can look for solutions that cause less headache, such as providers of technological and logistics infrastructure. Likewise, companies that handle regulation, reconciliation, and transaction security against fraud, complementing BaaS solutions.

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