With the advent of digital banking, there is an increasing trend of non-financial companies offering a host of financial services, including online payments and lending. As expressed by leading venture capitalists, facilities like embedded finance are “making every company into a fintech company.”
Today, in the lending domain, banks and financial institutions are looking at innovative ways to improve their scale and efficiency. As with other services, the lending service also needs a high degree of process automation. Banking-as-a-Service or BaaS solutions are serving the intermediate layer between “traditional” banking and non-banking or fintech businesses.
For instance, through their popular lending platform, eCommerce companies like Amazon are offering business loans to their U.S. customers. The ride-sharing company, Uber, is another example of a company leveraging BaaS to provide debit cards to its business partners and drivers.
So, what is the importance of BaaS in the traditional banking sector? Let’s understand that first.
With the rise of mobile banking and digital payments, traditional banks are under constant pressure to deliver exceptional products and services to their customers. The emergence of fintech apps means customers now have innovative ways to perform their banking transactions.
As a cloud-powered model, BaaS enables banks to save costs by outsourcing the required IT infrastructure. This also enables them to focus on the core elements of their banking operations. Thanks to the scalability of the BaaS infrastructure, this model is sufficient to meet the growing needs of the banking sector. By using the latest technologies, BaaS enables banks to:
So, is BaaS the long-term solution to global lending? Let’s explore this possibility.
For a long time, banks and financial institutions have depended on business partners to distribute their products among consumers. This is regarded as a low-margin and high-volume business model. However, banks often struggle with high costs due to the presence of legacy infrastructure and manual processes. The American Bankers Association states that most banks continue to use legacy systems designed four decades back.
Fintech companies like PayPal and Stripe have disrupted the “traditional” lending model by managing financial transactions without depending on legacy systems. Mobile users have gravitated towards embedded finance – as BaaS technology provides them inclusive credit based on third-party usage. In the B2B space, embedded finance is gradually replacing cheque-based payment settlements.
Here are some of the factors that are driving the adoption of BaaS and embedded finance:
Next, let’s discuss how BaaS technology can accelerate lending services.
As a cloud service, banking-as-a-service can overcome major banking-related challenges such as:
Traditional banks continue to work with outdated technology or banking systems. Through banking APIs, BaaS makes it easier for banks to promote and publicize banking products, including business lending.
With the growing adoption of digital banking, hackers and cyber fraudsters have more opportunities to compromise data security. With BaaS-based solutions, banks have a new technology to protect their money and customer data.
Due to the presence of legacy infrastructure, traditional banks do not possess the capability to make data-driven business decisions. Besides, they cannot easily access real-time data from fintech apps. The BaaS model changes all that. As an intermediate layer, BaaS enables data sharing between traditional banks and third-party systems. For instance, a BaaS-enabled online lending platform enables faster and more efficient loan processing that is beneficial for both parties.
BaaS technology also enables sharing of customer and financial data between the two parties, thus building business trust and collaboration. As fintech companies operate without banking licenses, BaaS cloud platforms facilitate the safe storage of financial information that is crucial for their business. This kind of collaboration can also improve the customer experience – and provide better market opportunities for traditional lenders.
BaaS platforms also enable decentralized finance (DeFi) that builds transparency into lending processes. Effectively, this makes it easier for no-income (or low-income) individuals to borrow money without paying high-interest rates or fees.
Going ahead, BaaS platforms can catalyze the integration of traditional banks, fintech companies, and non-banking companies using the same cloud infrastructure. With the introduction of BaaS APIs by traditional banks, fintech companies can improve their customer service. They can also offer more flexible loans using customer data obtained from traditional banking systems.
In summary, cloud-powered BaaS systems enable traditional banks to partner with fintech and non-banking companies. Both sides can easily exchange data quickly and safely, thus having more control over their data. As a subset of BaaS, embedded finance also facilitates banking services like online payments and lending.
With a focus on the fintech industry, Verinite has enabled its fintech customers to improve their financial services through innovative solutions. We provide end-to-end services in digitalization, automation, application development, and testing.
Want to know more about our BaaS services? Get in touch with us today!