In the near future, every business out there might just be a fintech, whether they are directly licensed financial entities or leveraging on a licensed entity. In essence, the integration of financial services into products offered by non-bank businesses would provide a revenue stream that would effectively entice them to improve and offer further financial services.
Already, companies like Uber and Lyft have created financial services that act as a bank for their drivers. Many online retailers also offer their customers deposits, loans and payment discounts to facilitate payment.
All of these are possible through banking-as-a-service which allows non-banking institutions to create digital banking infrastructures within their businesses for customers. The business model is catching on worldwide, but surprisingly, African banks and businesses are hardly embracing this opportunity.
Banking-as-a-Service - A brief
The term 'Banking as a Service (BaaS) describes a model in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses. Essentially, they lend their banking platform capabilities through APIs to non-bank businesses.
This way, a non-bank business—say a mobility provider, hotel, airline, marketplace, etc—can offer its customers digital banking services such as mobile bank accounts, debit cards, loans and payment services, without needing to acquire a banking licence of their own.
Banking-as-a-Service (BaaS) is a key component to open banking, in which banks open up their systems and allow third parties to access their data to enhance their own services. This growing market is transforming retail banking, reshaping incumbents' relationships with customers, and easing entry for fintechs.
Why BaaS and how it works
Businesses offering any form of digital financial services are automatically considered financial service providers. In effect, they are required by regulators to obtain banking licences before they can offer those services. The licence often requires significant capital and compliance on the part of the financial provider, coupled with the difficulties and delays involved in obtaining it.
Therefore non-bank businesses prefer to partner with an existing bank through a BaaS provider. Non-bank entities then pay a fee to access partner banks' digital banking services through BaaS platforms. The BaaS platform acts as a blank slate for the external party to build whatever financial product they desire and brand it as their own for customers.
The bank's system communicates via APIs and webhooks with that of the external party, enabling their customer to access banking services directly through their website or app. In the background, the external firm never really handles customers' money even though their application interfaces suggest so. The bank's payment rails do all the work, saving the firm from any regulatory burden the bank has to fulfil in the process.
This business model is a win-win for both banks and businesses looking to integrate banking services. It's no wonder why it's catching on worldwide.nnFor banks, it presents a huge revenue stream earned by charging clients a monthly fee or a set fee for the banking services and underlying banking infrastructure they provide. Businesses have the unique opportunity to streamline banking operations, expand product capacities, deliver creative financial offerings to offers and increase revenue streams.
African markets lagging behind
While many banks and businesses worldwide are taking advantage of banking-as-a-service, their African counterparts are struggling to embrace it.
Banks, who are meant to be the major drivers of the business model across Africa, are often hampered by the lack of technological infrastructure or the know-how to offer BaaS. And as more startups and companies in Africa move towards auxiliary financial services, banks are losing out on the opportunity to capture and expand into this innovative revenue stream.
Non-bank businesses, on the other hand, may largely be unaware of the banking-as-a-service business model or its benefits and therefore are not incentivized to create product offerings backed by BaaS for customers.
Intensive marketing from banks and BaaS providers serving African banks would fix this and open up a wealth of opportunities for all parties involved. With open banking extending its claws into every financial market worldwide, now is the time for African banks and businesses to embrace banking-as-a-service or miss out on the opportunities the full bloom of open banking would bring.
Exploring Banking-as-a-Service with SpotBanc
By partnering with SpotBanc, African banks can develop the capacity to deliver banking-as-a-service to existing fintechs and non-bank businesses. We help you prepare for and take advantage of market opportunities flooding African markets in form of new startups and expanding fintechs.
Fintechs and non-banking businesses can build desired financial products, including creating a functional neobank within days, using SpotBanc. Select and partner with any of our licensed banking partners and gain full access to their banking services or onboard your own banking partner within SpotBanc. Our ecosystem is intentionally built to help African businesses start offering financial services to customers with ease.
To learn more about SpotBanc bank-in-a-box service offering, contact us.