Just a few years ago, Banking as a Service (BaaS) was a term hardly ever heard in Latin America outside of the industry.
One COVID-19 pandemic later, it is now one of the fastest-growing segments in fintech, contributing to the digitization of the regional economy.
Since 2019, the case for BaaS has grown stronger as the region leaped years in digitization. Isolation measures had the unintended result of advancing e-commerce and online financial services.
With that, the need for digital payments only grew. It has taken banking as a service to a new level: it is no longer a niche within the fintech industry but a growing demand business model.
“Banking as a service allows any company that wants to offer financial services to its clients to do so in a faster and simpler way, without the need to develop its infrastructure or request a regulatory license,” said Juan Fantoni, co-founder at BaaS firm Pomelo.
Fintech companies that are unwilling to go through the cumbersome task of building a bank of their own (or do not have pockets deep enough to buy one) are left with a third option. That is, consuming banking services on demand.
BaaS is a business-to-business model that lets neobanks and other fintech companies connect with a banking infrastructure provider directly through APIs. That way, they can add bank offerings to its suite.
It can be a valuable shortcut for companies that are not specialized in banking.
“Launching a fintech solution in the region is really complex,” said Fantoni. “With BaaS, fintechs can develop financial products easily and quickly while they focus on their core proposition and user experience.”
It can also be a temporary measure for fintechs looking to acquire a license or develop their bank.
“Today, a basic package comprising user onboarding, digital accounts, and cards can take at least 12 to 18 months. And you don’t even get to differentiate yourself in the market,” said Fantoni.
In reality, banking as a service works like a plug-and-play feature that allows any business to incorporate a financial product quickly. But the industry is still in the early stages, and he claims that much of the current offering is “incomplete” and in some cases “obsolete.”
According to Julian Colombo, founder at N5 tech firm, the opportunity for Baas does not stop in the fintech industry. “There is a huge potential for banking as a service in Latin America.”
Potential clients can go from financial technology companies to delivery apps, online shops, or even gas stations and universities.
“Everyone wants to sell a credit card today or offer banking products,” said Colombo. “That is why banking as a service will continue to explode in demand. Ultimately, every kind of company with clients will be able to serve financial products.”
Profit from legacy infastructure
There are two major types of BaaS providers: financial technology companies specialized in BaaS or banks.
“Banking as a Service enables different actors in the digital ecosystem to offer banking products tailored to the customer, where and when they need it,” Spanish bank BBVA, which invested in a German Baas provider solarisBank earlier in 2018, noted in an article.
It can also be a way for banks to profit from their legacy infrastructure.
In a market analysis sponsored by Mastercard, Lindsay Lehr wrote that “The industry is migrating toward ‘banking as a service’: financial services at consumers’ fingertips with the click of a button, anytime, anywhere.”