What is Banking as a Service, and how does it work?

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February 15, 2023
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3 min read

Not all startups are fintech startups, but the ability to facilitate payments, offer credit, and issue debit cards could be a competitive advantage for most startups.

However, doing some of these things requires a finance-related licence and technological infrastructure. This is where Banking as a Service comes in allowing startups to offer financial services without developing technology or paying for expensive licences.

 What is Banking as a Service? 

Banking as a Service (BaaS ) is a way for bank and non-bank businesses to offer various financial services without worrying about licences or building a technology.

Imagine Bumpa, a platform that provides business owners with an online storefront and business management tools, giving its users account numbers for their customers to make payments, issuing debit cards for those accounts, and providing credit facilities.

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While this improves customer experience for Bumpa, it essentially makes the business management app a bank. And to be a bank, you need a banking licence.

Bumpa could decide to spend millions of dollars on a licence and even more on building a banking infrastructure. BaaS, however, speeds things up for them.

BaaS is an arrangement where a licensed bank integrates its digital banking services directly into Bumpa through an application programming interface (API).

Bumpa's customers open bank accounts and get debit cards directly on Bumpa, but in reality, Bumpa offers these services via a licensed bank or BaaS platform. Bumpa doesn't even hold the money in the bank accounts created for its customers.

Not only is Bumpa free of regulatory duties, but it also does not have to build any new technological infrastructure.

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Non-banks aren't the only startups that can use BaaS.

PiggyVest, for instance, would need to get a licence to go beyond savings and investments and offer its customers deposit, bank account, and debit card services.

But with BaaS, it can circumvent the licence requirement by connecting to a licensed bank's API — for a fee — and creating a frontend for customers to interact with.

  Is BaaS the same as embedded finance? 

Some businesses already offer financial services through fintechs, so one can assume that embedded finance and BaaS are the same. However, embedded finance is more of a frontend integration which means you'll be directed to the fintech platform (Paystack, for example) offering the financial services.

BaaS, on the other hand, happens mainly on the backend. This means the bank account and credit facility provided by Bumpa can be accessed on Bumpa, but a licensed bank provides the service on the backend.

With embedded finance, it is evident that the financial integration comes from an external bank or fintech. But with BaaS, the services will be Bumpa-branded.

  Is BaaS the same as API fintech?

BaaS and API fintech are not the same. They are only similar because they involve connecting to a financial institution via an API.

However, the difference between the two is the reason for the connection. When it comes to API fintech, a connection is established to share data, whereas, in BaaS, the connection is to create integrated banking services.

When you sign up on a loan app, for instance, they need data on your financial activities across all your bank accounts.

To get this, they connect with an API fintech platform like Mono, an intermediary between the bank and the loan app.

The process is similar in BaaS but with a few differences.

If a platform like CDcare, for instance, wants to issue debit cards and provide a deposit bank account for its users through its platform, it will need to connect with a BaaS platform like Anchor, which will share only technology with CDcare.

Featured image by: Image by wirestock on Freepik


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He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.
He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.
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He's a geek, a sucker for Blockchain and an all-round tech lover. Find me on Twitter @BoluAbiodun1.

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