Banking-as-a-Service Hype vs. Reality – How To Do BaaS The Right Way?

The hype is real.

Not a day goes by that you don’t see the news of another Banking-as-a-Service program emerging in the financial services landscape.

Though the concept has been around for years, Banking-as-a-Service has exploded to the point that these days everyone who’s anyone in financial services is venturing into BaaS with a version of their own.

The concept seems so easy and straightforward, makes one wonder why financial services were ever so resisting digitalisation in the first place?

The Simple Promise of Banking-as-a-Service

In essence, BaaS enables brands and companies from different industries to offer financial services such as payments, credit cards, deposit accounts and loans through digital.

They do that by integrating with existing banks’ infrastructure and license via APIs, thus avoiding the notoriously long and costly procedures associated with financial regulators.

The enormous potential that arises from this decoupling of financial services from bank tellers and branches is easy to make one euphoric.

If now basically any business can provide card issuing, account opening and payment processing services, then these services effectively leave the constrained realm of traditional financial institutions and are free to be implemented wherever an organization may find suitable.

That may be at places previously unheard of and to audiences previously uncatered to. At the same time, that may create new revenue streams for the new financial services providers.

But while the promise of BaaS is simple, execution is not.

The reason lies in the often overlooked aspect of financial services – regulatory compliance.

For Full-Fledged BaaS, You Need More Than APIs

Do regulatory compliance requirements somehow magically dissapear for brands that want in on the Banking-as-a-Service? Of course not.

Banking is one of the most highly regulated industries in the world, and anyone engaging in Banking-as-a-Service partnerships has to carry their share of the compliance burden.

What some might mistakenly lead you to believe, is that technology alone can solve all the parts of the financial services equation.

Technology can really automate many procedures and boost efficiency across the business cycle, but some really important aspects, like fraud prevention, are the hardest to pull off.

The thing is that machine learning has limited capacity. It has a built-in flaw in that it heavily relies on scale to be truly successful.

In other words, for software to become really competent in any matter, it has to process millions of different cases and scenarios where this matter occurs. And as painful as they might be for institutions dealing with them, fraud attempts generally don’t come in millions.

For these reasons and more, the most important thing you should look for in your Banking-as-a-Service provider is actual banking know-how and the regulatory compliance expertize.