Banking-as-a-Service platforms: Considerations for selecting the right BaaS provider

The use of Banking-as-a-Service (BaaS) platforms is gaining popularity among non-banking companies, providing them a ready-to-go platform to digitize and streamline their operations and rapidly scale-up their challenger offerings. With dozens of BaaS providers on the market, a rigorous vendor due diligence is key, write Bas van Donselaar and Shubham Lakhani from PaymentGenes.

With the emergence of Banking-as-a-Service platforms, financial industry challengers such as digital banks or fintech’s, or other companies that aim to tap banking services such as merchants, corporates and platforms, can access proven off-the-shelf technology to meet their needs.

Many neobanks like N26, Revolut, and Monzo for instance relied on Baas to offer banking products such as accounts, money transfers, and currency exchange before they secured banking licenses. Many fintechs use BaaS to serve parts of the banking market, while merchants and e-commerce platforms can use BaaS to offer payments, among many use cases.

According to advocates of BaaS, the technology swap between incumbents and new players encourages a more vibrant fintech ecosystem. BaaS enables business model reinvention, drives differentiation within banking, as well as the emergence of better and more diverse offerings for consumers.

Banking-as-a-Service platforms in essence support back-end banking processes, and handles regulatory compliance, security, and risk management. The platform can enable third parties to offer products such as deposit accounts, cards, payments, and loans. Non-banking companies then integrate these services into their own offerings through so-called APIs without the need for significant capital investment or regulatory overhead.

Meanwhile, Banking-as-a-Service offers banks and software houses with an attractive market to ‘sell’ their IT expertise, and as a result, there are dozens of options on the market for non-banking companies. So how do you select the right provider?

Assessing the business need

The first step for selecting a BaaS provider should focus on an assessment of the requirements from the business. Assess their needs and objectives to ensure that BaaS is aligned with their requirements. Key factors to consider include:

Use-case
To maximize the benefits of introducing a financial product, it is crucial to thoroughly analyze the customer journey and identify the optimal touchpoints for integration.

Research indicates that 28% of surveyed BaaS adopters emphasize the importance of a BaaS provider's deep understanding of their customer journey to achieve the best outcomes. Several use cases can be considered based on your company’s type and the BaaS solution you are seeking:

• A neo bank may be seeking software to support current accounts and virtual setup
• A retailer or airline may be seeking to launch a co-branded creditcard
• An e-commerce player may want to launch a loyalty program with an integrated e-wallet
• A food delivery app may want its app to integrate with an e-wallet or banking account

Business model assessment
The next step is to conduct a gap analysis to identify the capabilities that need to be added to realize the use case.

Crucially, this analysis should determine whether these additions create a lucrative business case, evidenced by a positive Net Present Value (NPV). A survey reveals that brands implementing BaaS are primarily motivated by the potential for new revenue streams (41%), increased consumer spending (40%), and enhanced customer loyalty (40%).

Regulatory compliance
Consider the regulatory landscape your business operates in. Ensure that the BaaS solution you choose complies with local and international regulations such as GDPR, AML (Anti-Money Laundering), and KYC/B (Know Your Customer or Business). This includes verifying that the provider’s offerings meet the compliance standards required for your industry.

Customer needs
It is essential to ensure that any new solution enhances customer satisfaction. To achieve this, survey with a sufficiently large and representative sample of your customer base. The survey should aim to answer key questions such as:

• What specific problem are we solving by introducing this product feature?
• How will this feature impact the overall customer journey?
• Will this addition contribute to higher customer retention rates?
• What is the expected adoption rate among our customers?

By addressing these questions, you can better understand how the new feature will align with customer expectations and drive long-term loyalty.

Selecting the right BaaS provider

When selecting the right BaaS provider a few important factors need to be considered before you can make the right decision.

Evaluating the compatibility with BaaS provider’s risk profile
Each provider has its own criteria for assessing client risk, which can impact their operational policies and service offerings. It's crucial to determine how well your customers fit within these parameters to avoid potential issues. The following questions should be considered, among many.

• Is the geographical scope of your customers covered by the provider?
• Does the range of services provided by your company align with the provider? For example: a provider might be reluctant to partner with high-risk industries like gaming and gambling.

Compliance, regulation, and fraud management
Businesses must educate themselves on the types of licenses that exist and which ones are held by a BaaS provider.

Typically, a BaaS provider holds an EMI (Electronic Money Institution) license which allows it to issue electronic money and provide payment services. However, if a business wants to introduce lending products, they will have to partner with a fully licensed BaaS provider, which holds the appropriate licenses or outsource this to another partner, which involves complexity.

Furthermore, it is important to ensure that a BaaS provider has the capability to provide compliance (KYC/KYB) and fraud management (Anti Money Laundering, et cetera) services in-house or has the right type of third-party partnerships in place, otherwise a business would have to spend resources to find a provider themselves.

Level of freedom and customization
BaaS may come with customization limitations. This can make it challenging for businesses to tailor financial services specifically to their target market, potentially impacting their competitive edge. Therefore, it is crucial to assess the amount of operational flexibility offered by a provider.

For example: a Neo Bank targeting freelancers might want to offer features like tailored savings plans, but a provider’s limited product suite restricts their ability to innovate and meet these specific needs.

Technological infrastructure
It is important to ensure that a provider offers user-friendly APIs that facilitate seamless integration with your current systems. This specifically applies to all the stakeholders who are involved in the integration process. RESTful APIs are particularly beneficial for developing financial applications, as they reduce the need for complex, costly, and difficult-to-maintain customizations.

Cloud
When partnering with a BaaS provider, cloud interoperability is key. Different cloud services offer unique strengths, such as GDPR compliance for data security or global scalability. To choose the right provider, companies should focus on what aligns best with their needs, like security, cost efficiency, or access to innovation and support.

Industry partnerships
The provider should have a proven track record of launching successful products and expertise in the payments industry, ideally with experience in your specific sector. This reduces friction when implementing, managing, and expanding the service offering. Additionally, it’s crucial to avoid any conflicts of interest, as the BaaS provider may offer a similar product or have clients operating in the same space. 

A consulting partner
Expert consulting firms can assist you throughout the entire process, from conducting a requirements analysis to defining your product strategy. At PaymentGenes, we help assess the feasibility and viability of your solution design, build a solid business case, and select the right BaaS provider via a thorough vendor selection process. This comprehensive support ensures a smooth launch and the success of your service offering.

Software provider
In some cases (depending on the product needs), a company might also have to partner with a core banking software provider, as a BaaS provider mostly provides an API and does not undertake the complex tasks related to core banking. For example: if a company wants to offer unique credit card rewards or specialized savings accounts, they may need to integrate with a core banking system.

Making a decision

Once the company has established its strategic objectives, it will need to carefully select the right partners and decide who to collaborate with.

When choosing a BaaS provider, increasing certainty in your decision-making is crucial. Go beyond vendor presentations by validating their capabilities – visit reference clients, review their API documentation and architecture, and conduct a Proof of Concept to test core platform functionalities and integration capabilities. This thorough approach ensures you’re selecting a partner that meets your business needs in a rapidly evolving market.