Unlocking the Value of Banking-as-a-Service: Three Essential Components

Unlocking the Value of Banking-as-a-Service: Three Essential Components

October 18th 2023

Introduction

In today’s dynamic intersection of finance and technology, Banking-as-a-Service (BaaS) stands as a transformative force, akin to Software-as-a-Service (SaaS) in the world of banking. A study finds that the cost to acquire a customer that is typically in the range of $100 to $200 can be $5 to $35 with BaaS. BaaS has redefined the landscape by enabling platforms to effortlessly incorporate financial services into their offerings, streamlining transactions, and presenting customers with an all-encompassing solution for their financial requirements. In this exploration, we will uncover the critical components of BaaS that underpin this revolutionary shift.

Component 1: Simplified Financial Services Integration

In the realm of Banking-as-a-Service (BaaS), one of its most remarkable aspects is the simplification of financial services integration. This component revolutionizes the way platforms seamlessly incorporate banking services, traditionally confined to the domain of traditional banks, into their ecosystems. BaaS providers, acting as intermediaries between platforms and banks, play a pivotal role in facilitating this integration, allowing platforms to harness BaaS APIs and streamline financial transactions. To illustrate the transformative impact of simplified integration, let’s delve into a real-world scenario:

Imagine a software platform that specializes in providing appointment scheduling services for salons and barbershops, a vital lifeline for these businesses to efficiently manage their appointments, customer relationships, and overall operations. In the traditional landscape, these businesses faced a myriad of financial challenges, each requiring a separate interaction with different financial institutions.

1. Opening Bank Accounts: Traditionally, these salons and barbershops would embark on the arduous journey of opening bank accounts for their businesses. This entailed visits to local brick-and-mortar banks, the submission of extensive business documentation, and a waiting period for account approval. In some cases, if not approved for a business account, they’d resort to mingling their personal and business finances, resulting in a convoluted financial structure.
2. Applying for Loans: The salon or barbershop owners might require capital to expand their business, renovate their studio, or invest in marketing efforts. To secure a loan, they’d follow a similar pattern—visiting banks, completing lengthy loan applications, and dealing with the uncertainty of loan approval. Oftentimes, they’d need to apply at multiple banks before successfully obtaining funding.
3. Obtaining Credit Cards: Additionally, these businesses might need credit cards to manage expenses, purchase equipment, and procure supplies. This would involve yet another journey to different banks, re-submitting their financial information, and managing multiple cards and accounts.
4. Fragmented Financial Management: The end result of this traditional approach was fragmented financial management. These businesses would grapple with the challenge of transferring funds between accounts, tracking income from their appointment software, managing loan repayments, and reconciling finances across various tools and systems. This process was not only time-consuming but also prone to errors and financial inefficiencies.

However, with the advent of BaaS, this scenario undergoes a remarkable transformation:

BaaS empowers the platform to consolidate all these financial services within its ecosystem, thereby offering a seamless and comprehensive solution to salon and barbershop owners. Customers using this platform can effortlessly navigate through a range of financial services, all accessible in one unified environment:

1. Effortless Account Opening: Customers can open business accounts without leaving the platform. The need for physical visits to banks and extensive paperwork becomes obsolete. BaaS streamlines the onboarding process, allowing businesses to swiftly set up accounts, reducing the administrative burden, and providing a hassle-free experience.
2. Quick and Convenient Loans: When businesses require capital for expansion or investment, BaaS offers a rapid loan approval process. The platform, with its deep understanding of its customers’ financial history and industry-specific needs, expedites the loan application and approval process. This means businesses can secure funding faster, enabling timely investments in their growth.
3. Integrated Credit Cards: Businesses can apply for and manage credit cards seamlessly within the platform. The integration ensures that cards are closely tied to their financial accounts, enabling immediate access to funds earned through sales. This convenience simplifies expense management, as businesses can use the card for purchases related to their operations.
4. Streamlined Financial Operations: Above all, BaaS simplifies financial operations by offering a one-stop-shop for all financial activities. Income from appointments, loan funds, and expenses are seamlessly integrated into one system, providing businesses with real-time financial insights. This not only saves time but also enhances financial accuracy and efficiency.

Component 2: Enhanced Customer Lifetime Value

BaaS doesn’t just simplify financial services; it enhances customer lifetime value (LTV). By offering a comprehensive ecosystem of services, platforms encourage customers to use their products more frequently and for longer durations. This reduction in churn and increased stickiness can be seen through various real-world examples:

1. Neobanks: Neobanks, entirely digital banks without physical branches, have leveraged BaaS to create all-in-one financial solutions. They offer customers not only basic banking services but also budgeting tools, investment options, and even cryptocurrency trading. By providing this holistic suite of services, Neobanks like Chime and Revolut have cultivated a strong customer base that relies on their platforms for a wide range of financial needs, reducing the incentive for customers to seek out traditional banks.
2. E-commerce Platforms: E-commerce giants like Amazon have integrated financial services into their ecosystems. Amazon Pay allows customers to make payments seamlessly on various online platforms using their Amazon account information. Additionally, Amazon offers credit cards with rewards tailored to their shopping habits. By doing so, Amazon not only increases customer loyalty but also extends the time customers spend within their ecosystem, leading to more frequent purchases.
3. Business Software: Business software platforms offering BaaS components enhance their customers’ LTV by becoming indispensable tools for daily operations. For instance, software-as-a-service (SaaS) platforms that provide accounting and invoicing services can integrate BaaS to offer easy access to business loans or lines of credit. This keeps businesses reliant on the platform for both core operations and financial needs, reducing the likelihood of switching to separate providers.

In each of these examples, the integration of BaaS not only simplifies financial transactions but also fosters a deeper relationship between customers and the platform. By providing a broader spectrum of services, platforms become integral to customers’ daily lives, making them less likely to switch to competitors. This, in turn, translates to enhanced customer lifetime value and long-term sustainability for the businesses that embrace BaaS.

Component 3: New Revenue Streams

Embedded finance is not just about simplifying existing financial services; it’s also a gateway to creating entirely new revenue streams for platforms. It’s estimated that SaaS companies can significantly boost their revenue, potentially doubling or even quintupling their earnings, by adding financial services into their offerings. This transformative shift in business models opens up various avenues for generating income:

1. Interchange Revenue: One of the primary ways platforms can generate revenue through embedded finance is by capturing interchange revenue. Interchange fees are charges that accompany card transactions. When customers use the financial services offered by the platform, such as making payments or using a platform-issued card for purchases, a portion of these fees can be directed back to the platform. This income stream can grow in tandem with the volume of financial transactions conducted within the platform’s ecosystem.
2. Payment Processing Fees: Platforms can earn revenue by charging payment processing fees. When customers make payments through the platform, either to other users or external parties, the platform can levy a fee for facilitating these transactions. This is especially lucrative for platforms that handle high volumes of transactions, such as marketplaces or e-commerce platforms.
3. Facilitating Financial Services: Some platforms opt to facilitate financial services on behalf of bank partners. For instance, a platform can collaborate with a lending institution to offer loans to its customers. In such partnerships, the platform may receive a referral fee, or a share of the interest earned on the loans. Similarly, platforms can partner with banks to offer savings or investment products, earning a commission on the assets managed within their ecosystem.

Conclusion

Banking-as-a-Service (BaaS) is the game-changer of today’s financial landscape, much like Software-as-a-Service (SaaS) revolutionized technology. Exploring its three vital components, we’ve witnessed how BaaS simplifies financial services integration, enhances customer value, and opens doors to new revenue streams. It erases the complexities of traditional banking processes, fosters lasting customer loyalty, and offers platforms new avenues for income. In this era of financial innovation, BaaS stands as a powerhouse, shaping industries and ushering in a new era of possibilities. The future of banking is here—more accessible, dynamic, and lucrative than ever before.

About the Author:

Mayur Shetty has been a key leader in the transformation of Duck Creek, a leading provider of P&C insurance software, in his role as a Software as a Service (SaaS) evangelist. From its early stages, Shetty played a crucial part in shaping Duck Creek’s evolution from a software/product-focused organization to a prominent provider of P&C insurance SaaS solutions, culminating in a successful IPO. During this transformative journey, Shetty led the modernization of Duck Creek’s software into a cloud-native application hosted on Microsoft Azure. This involved implementing robust governance measures that encompassed security, scalability, and financial operations (Fin-Ops) practices. Under Shetty’s guidance, the SaaS business experienced exponential growth. Recently, Shetty has joined Curinos as VP of SaaS-Ops , a renowned player in the analytics and artificial intelligence (AI) domain, where he is responsible for maturing their SaaS practices for data and AI models.