Recent years have seen a rising tide of new, digital-centric neobanks and fintechs, conceived and built from the ground-up with user-friendliness and flexible functionality as guiding principles, that have shaken up the financial services industry. 

Unfettered by outdated legacy tech stacks and hidebound corporate mindsets, these providers quickly have gained significant traction among consumer and business users alike by delivering easily accessible, highly adaptable services that were purpose-built to fulfill the needs of modern digital financial services customers. 

The good news for banks is that these new market entrants can’t fulfill all of those needs. Many cornerstone financial services capabilities–including issuing payment cards, holding deposits and extending credit–require the involvement of a fully licensed, chartered bank, even when provided digitally. 

Some banks have opted to leverage this licensing advantage and go it alone in building out their own in-house digital offerings. But given the technological requirements and channel expertise necessary to succeed in the digital space, many financial institutions have decided there’s a smarter, more efficient way to adapt to the digital banking boom–by partnering with these new entrants rather than competing with them. 

Enter Banking as a Service, or BaaS.

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How Banking as a Service (BaaS) Can Benefit Banks in 2023

The Galileo Financial Technologies Podcast

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Meeting the digital banking demand.

The world of banking–and what it means to be a bank–is changing. The increased ubiquity of the digital channel in nearly all aspects of daily life, from entertainment to shopping to doctor visits, has created and fostered user expectations for experiences that are convenient, fast and delivered on-demand. 

Those expectations are no different when it comes to digital financial services. Consumers increasingly are demanding access to the tools they need to conduct their financial lives when, where and how it’s most useful and contextual for them. 

Customer-centricity and interoperability, of course, haven’t exactly been hallmarks of the banking industry, which historically has been characterized by service models designed to prioritize the bank’s needs over those of its customers, with siloed, rigid platforms and clunky, inconvenient user experiences the norm. 

Banks used to be able to get away with that approach, simply because there was little alternative. But no longer. 

Galileo research has revealed significantly higher customer satisfaction with digital banks versus traditional banks, and found that more than 60 percent of consumers indicated that they were likely to switch to a digital-only bank as their primary provider in the near future. 

That demand for digital banking has in turn sparked a Banking as a Service boom–and 2023 is shaping up to be BaaS’s biggest year yet. 

A newly released study conducted by Galileo in cooperation with American Banker revealed that:

• 78% of C-suite-level bank leaders were prioritizing adding BaaS capabilities, 

• 77% of institutions prioritizing BaaS listed remaining competitive as a key motivation for doing so

• 59% of BaaS-prioritizing banks already were at least in the testing phase of BaaS capabilities

Those findings echo a recent Finastra survey of 1,600 senior financial services industry executives that showed: 

• 85% of respondents already had implemented or were planning to implement BaaS over the next 12-18 months

•  80% of regulated financial services providers expect the overall BaaS market to grow. 

• $7 trillion is the size of the overall BaaS market opportunity 

Those findings are just a few examples among a trove of data and other indications that BaaS is set to skyrocket in the year ahead.  

So what exactly is it? 

What is Banking as a Service?

In its simplest form, BaaS is a partnership model under which a fully licensed bank allows a partner non-bank or fintech to access its core systems and regulated infrastructure via application programming interface (API), in exchange for a fee. The non-bank partner then leverages that connectivity to deliver banking products and services to its customers within the context of its own platform and user interface. 

Also known as “white-label banking,” this arrangement enables non-banks to greatly expand the range of financial services that can be provided to customers. For instance, a neobank that doesn’t have a banking charter or FDIC insurance must have a fully licensed bank partner to actually hold customers’ deposits, as well as support payment cards or loan provisioning, among other key financial functions.  

Non-financial providers also can leverage BaaS in order to provide financial tools to customers under the model known as embedded payments or, more generally, embedded finance. A common example of such an arrangement is a retailer issuing an own-branded payment card or mobile app, or offering point-of-sale financing or insurance. 

Click here to learn more about how embedded finance is transforming banking.

For both financial and nonfinancial providers, allying with a bank under a BaaS arrangement enables the delivery of services that significantly improve the customer experience in a much faster and more efficient, less burdensome way than becoming a fully licensed bank and building core banking systems themselves. 

This way, the non-bank instead can focus on integrating those banking or financial functionalities with the other capabilities of its platform to create a robust, seamless offering for users.

For non-bank providers, then, the value proposition of BaaS is clear. But what’s in it for banks?

BaaS benefits for banks.

For fully licensed financial institutions, Banking as a Service offers several compelling advantages that can significantly benefit their business in the short term–and also serves as a  potential pathway to the long-term transformation that will be necessary for banks to remain relevant as the financial industry evolves.

New revenue streams.

The most immediately recognizable direct benefit of BaaS is the opportunity for new and profitable revenue streams by selling API-based access to core banking products and services to non-bank partners, either on a recurring or per-service basis. Other sources of revenue could include set-up charges or revenue-sharing agreements.

Enhanced customer acquisition and retention.

Many non-bank brands have extremely large–and dedicated–customer bases that represent a massive potential audience for banks that partner with those third-party providers. By servicing those end-users via BaaS, banks can reach those new potential customers much more effectively and at significantly lower cost than by trying to acquire them directly. This acquisition efficiency has become even more important as competition for financial services customers continues to heats up with new players entering the market on a regular basis.

Beyond making it easier for banks to gain new customers, BaaS also can significantly help banks retain the ones they already have. By delivering their offerings within the context of the platforms and interfaces customers already are using, banks have the opportunity to provide the level of customized, easily accessible services that are widely becoming standard expectations–as well as to develop new, robust products and bundles that lead to increased customer satisfaction and loyalty, thereby driving better retention rates. 

Modernizing technological capabilities.

The banking industry as a whole remains significantly hindered by legacy technology infrastructures and inflexible core systems that limit the possibilities of what types of products banks can develop in-house–and the speed at which such development can occur. 

Banking as a Service offers an escape from these technological restraints. By building and delivering banking products using the leaner, more flexible and more powerful API-based tech systems of nonbank partners and third-party BaaS enablement platforms, banks can streamline development, lower infrastructure costs and improve data security. 

Shifting to a more modern tech stack also promises to break down internal product silos to increase interoperability, improve organizational efficiency and offer banks a more holistic view of their customers.

Click here for banks’ top 3 tech transformation priorities for 2023.

Continued relevance

Perhaps most essentially, Banking as a Service offers a chance for banks to fundamentally reshape their value proposition and role within the financial services ecosystem in ways that will help ensure they remain competitive and relevant as the industry radically transforms over the coming years. 

The prevailing historical model of banks occupying the central role in customers’ financial lives is rapidly giving way to a paradigm in which banks are just one component–albeit a crucial one–of an array of providers whose services work in harmony to meet customers’ financial service needs seamlessly and contextually across a wide variety of digital channels and platforms.

The prospect of such a large-scale shift understandably may be unnerving to banks long used to a dominant, standalone role in which they “owned” the financial services relationship with their customers. But banks that hesitate or cling to established paradigms risk losing market share and eventually facing obsolescence. 

And on the other side of the equation, the future growth of BaaS is projected to drive a massive opportunity for all parties involved–banks included–who act fast to gain a foothold as the market emerges over the near term. 

Contact us to learn how Galileo can help your financial institution reap the benefits of BaaS.

Stay tuned for Part 2 of our Banking as a Service guide, which will explore the BaaS opportunity for fintechs and non-bank brands, coming soon.