Banking as a Service
In the dynamic and competitive world of e-commerce, merchants succeed when they can exceed their customers’ expectations, going above and beyond to meet their needs. Payment and financing are one area where closing a deal can hinge on providing the customer with their preferred option, but going beyond the basics can be challenging for smaller retailers.
One possible solution is Banking as a Service, a new and easier way for merchants to offer financial services to their customers. What is Banking as a Service, and how can merchants best take advantage of the opportunity to offer banking services to their customers?
Complacency won’t get you very far as an e-commerce retailer these days. Consumers have high expectations because merchants, always on the lookout for a competitive advantage, keep providing more services, more convenience, and more attention to their needs.
The bar keeps getting raised, and some of the conveniences consumers hope to see—particularly in the realm of payment and financing options—can be costly and risky to provide, especially for small to medium-sized businesses.
Fortunately, this is one of those scenarios where problems created by the market can also be solved by the market.
Banking as a Service is a new concept that leverages the power of technology to enable merchants of any size to offer flexible, sophisticated financial services to their customers. Whether you’re looking to make payment and financing options that will help you sell your existing products, or you’re interested in offering bank-like services as part of your overall business model, Banking as a Service has the potential to be a powerful and cost-effective solution.
What Is Banking as a Service?
The “service” in Banking as a Service refers to any activities that require a banking license. It’s a way for banks to resell their licensed, regulated services through a third party that is not required to be licensed. In other words, BaaS allows merchants to offer bank-like services to their customers without having to jump through the same regulatory hoops as actual banks. Typical BaaS services include fund transfers and direct payments, acquisition and processing, digital wallets, loan approvals, currency exchange, and payment card issuance.
Obtaining a banking license is a complex process that can take up to a year. You need references, a business plan that justifies your need for a banking license, and funds to cover application fees—and this process has to be done in every state in which you want to conduct business. BaaS is a much cheaper and faster way to achieve the same ends, with little to no difference in terms of the customer experience.
While it has always been possible to contract with banks to carry out these services on your behalf, the BaaS concept allows for a much higher degree of flexibility, customization, and integration.
You’ll be able to offer these services in your own way, with your own branding and interface, rather than serving as an intermediary between the customer and your banking services partner.
How Does Banking as a Service Work?
BaaS usually involves three separate entities:
- A financial institution with a banking license
- A BaaS provider that communicates with the bank (usually through an API) in order to provide access to their financial products
- A merchant or fintech company that wants to provide BaaS products and services to their customers
Let’s use a Buy Now, Pay Later service as an example. You’re a merchant who wants to offer BNPL payment options to your customers, so you contract with a third-party provider that offers BNPL services. They provide you with the software that integrates the BNPL option into your checkout page, account management tools, and a way to assess lending risks. The third-party provider, in turn, contracts with an actual bank to handle the financing, credit checks, and other regulated services.
Under this framework, the customer has a smooth and positive experience selecting BNPL at checkout, with a seamless approval process.
The merchant is able to easily integrate this payment option into their site by dealing with the third-party vendor, who negotiates all of the complex technical and financial aspects behind the scenes with the bank.
With traditional banks facing competition from challenger banks and fintech startups, some have started offering BaaS directly to end-user clients, bypassing the need for a third-party provider. In these cases, the banks provide API connections to the client and assist them with integration and account management.
How Can Merchants Benefit from Banking as a Service?
Some of the most promising use cases for BaaS have to do with empowering smaller businesses to compete with big banks in terms of providing consumer-facing financial services (even though big banks may still be providing the underlying infrastructure for those services). BaaS has huge implications for challenger banks, fintechs, finance apps, and investors, but ordinary retailers and e-commerce merchants can realize big increases in sales revenue and customer loyalty by embracing BaaS technology, too.
It all comes down to giving your customers what they want and expect. BaaS can be used to offer direct fund transfer payments, lending options like BNPL, and other flexible and innovative payment options. This reduces cart abandonment, declined transactions, and exposure to credit card chargebacks.
BaaS can also benefit merchants indirectly, by allowing more competition in the acquirer and payment processor space. With a wider range of companies able to access the infrastructure that makes these services possible, merchants can choose more affordable providers who are a better fit for their business needs.
Conclusion
Merchants should always be looking for ways to diversify their payment options, with an eye toward their customers for guidance. Adding a new way to pay can take time and resources, especially if you’re doing your due diligence and researching the possible risks and tradeoffs. It’s important to make sure that you’re offering something your customers want and will use.
The cool thing about BaaS is that it greatly expands the potential options beyond the large and well-established alternative payment platforms. This can allow you to tailor your offerings to fit both your brand image and your customers’ wishes, resulting in better shopping experiences all around. BaaS payment options might not be right for every merchant, but they present yet another way to move away from a cards-only payments model that keeps you tied into the exhausting cycles of disputes and chargebacks.
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