Banking as a service: next-level digitalisation

By Cooper Bester
Senior Partner Manager of IDnow, Cooper Bester, discusses the perks of BaaS and its growing presence throughout the financial industry

Like many other services in the technology sector, Banking as a Service (BaaS) was heavily influenced by the effects of the pandemic. During and after various lockdowns and other stages of the global health alert, it became clear that consumers want to be able to access products faster, more reliably and using more modern technologies.

Research by IDnow, for example, found that 64% of Britons believe that digital processes such as remote account opening, online banking options or an easy-to-use app are either extremely important or important when deciding with whom they should bank. The new-age digital banks, which use BaaS technology, are delivering just that. Thanks to BaaS, non-bank institutions, such as technology companies or e-commerce platforms, can seamlessly integrate banking services into their product offerings without having to establish a fully-fledged bank.

Competition for more traditional financial institutions

By leveraging BaaS, technology or e-commerce companies can provide their end customers with a range of financial functions, such as account opening, payments and credit applications, all without the onerous task of developing an entire banking infrastructure from scratch. Simply put, it is comparable to ‘renting’ the banking capabilities of another company. The idea is to make banking more convenient and accessible by integrating it into various everyday services that people already use. Ultimately, it allows these tech or e-commerce companies to focus on what they do best, leaving banking to the financial experts.

Other recent developments in the BaaS space include digital-age non-banks using third-party APIs to connect to licensed banking institutions, thus enabling them to comply with AML regulations and other regulations set by the Financial Conduct Authority (FCA). Furthermore, there is a growing trend for leading BaaS providers, such as Solaris, to become more mature, for example by obtaining their own banking licences. As these players reach more advanced stages of maturity, they are competing with more traditional institutions on an unprecedented level.

BaaS democratises access to financial services

Several industries are at the forefront of BaaS adoption, including insurance, crypto, travel, medical, health and wellness, and food. Many companies in these industries are offering third-party rewards through API integrations because it enhances their value proposition and therefore attracts more end customers.

These rewards, which can include cashback, discounts or loyalty points, encourage consumers to engage more actively with the platform, and its associated financial services. Integrating third-party rewards via APIs into BaaS platforms not only increases consumer loyalty and satisfaction, but also facilitates strategic partnerships and revenue diversification for the companies involved.

While the private sector is embracing new BaaS models, there is a distinct lack of government commitment to digitisation and adoption of these new BaaS offerings in the public sector. As a result, regulatory frameworks are lagging, leading to potential security risks and inadequate consumer protection. To ensure the potential of BaaS is fully realised and adopted throughout the mainstream, governments need to be actively involved, provide regulatory clarity, and foster an enabling environment.

However, even with government support, finding the right BaaS service partner remains one of the biggest challenges. An ideal service partner will not only meet the specific needs of the organisation but enable to comply with local regulations, while remaining scalable. Ever-changing regulations on customer onboarding and consumer security remain the biggest risks in the BaaS model, both now and in the future.

Robust KYC processes in the BaaS model

Smooth, secure and reliable automated onboarding is essential for BaaS to work. Know Your Customer (KYC) processes play a very important role, as trust between the company and consumer is earned through the onboarding process. As in other banking environments, KYC processes mitigate risk, reduce fraud and ensure regulatory compliance. By verifying the identity of consumers at the sign-up stage, BaaS providers protect against illicit activity and maintain the integrity of the financial system.

Automated KYC processes are particularly important in BaaS models due to the volume and speed of transactions. As BaaS enables seamless and rapid access to financial services, manual KYC checks would be inefficient and time-consuming. Automated processes that use advanced technologies such as AI and machine learning to quickly verify user identities, analyse risk profiles and detect suspicious activity all make for a much more user-centric solution.

About the author

Cooper Bester is Senior Partner Manager of IDnow. A seasoned professional with extensive experience in driving revenue growth and expanding market share through strategic partnerships and channel sales. Bester has a track record of delivering accurate account reports to VP/C-level executives, facilitating continuous communications with customers, and achieving strategic/operational goals.

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