Creating Value Through BaaS

Learn about BaaS and how it affects the digital banking services we use everyday

Most of us realize already that modern banking has witnessed more change in 10 years than in the last 60. When you once had to physically go to the bank for a loan for new kitchen countertops, now you can swipe a credit card. Getting a business line of credit used to and still does involve phone calls and paperwork, but now some companies can approve you for $100k in minutes.

But how? For anyone who’s ever wondered how your transactions tally correctly in your online banking or why Apple got into the payments game, we’ll need to break down the fintech landscape into its basic building blocks. Then, we’ll learn how fintechs reassemble those parts in more valuable ways just like Arival is doing today. So let’s jump into the details and explore how banking’s structure relates to modern fintech banking’s flurry of value-inducing interconnectedness.

The BaaS model

You might have heard something referred to as as-a-Service as in platform for PaaS, software for SaaS, and now even Company-as-a-Service for early-stage company formation services out there. You also might have heard the term stack as in sales stack or a finance stack to refer to a set of sales or finance tools a company uses. Commonly overlooked is the banking stack which is a suite of digitally delivered, various money movement services that a company might offer on its back-end. This little banking stack is what’s called in the industry BaaS, or Banking-as-a-Service.

This BaaS stack is a fancy way of referring to the literal spine that undergirds our entire first-world financial services ecosystem. And just like the spine is made up of vertebrae and nerve connections, the BaaS stack employs a similar design.The most important part of any banking stack spine is the brain, or the all-worshipped bank charter beholden to only a select few masters of the banking universe.

You know how in Marvel movies the heroes are always going after a shiny bright object with some sort of tremendous energy potential? If the producers knew any better they’d make the shiny thing a banking license because they’re that hard to get.

It’s often lawyers who are employed to fill out the applications for these often-denied permissions which is why so few challenger banks in recent years have successfully obtained one. Luckily, there’s a loophole — you can rent a licensed permission from someone else and build your financial institution, or FI, right on top of it! Apple did just that for its debit card with Goldman Sachs, an elite bank known more for accredited investor services and underwriting humongous Wall Street deals but who decided to go more Main Street.

This is where marketing muddies the waters about who is carrying out which banking function in the stack. Truth-be-told, Apple is just the customer-facing, distribution arm for the bank which is actually Goldman Sachs’ product. Talk about synergy. Companies can now partner in totally new ways because of BaaS’ plug-and-play design that can separate licensing from the rest of a fintech’s many functions. Hopefully by now we’re starting to see how the flexibility of the disparate BaaS components can be leveraged in limitless variations to release value. But just like you follow a recipe step-by-step, you should now be wondering how Apple, a hardware and software company, connected their debit card product to the license with Goldman Sachs, something that would have been near impossible 10 years ago.

How it works

To explain how these connections operate we will have to back up a bit to understand what enables this unprecedented level of connectivity.

Through a series of open-banking initiatives, software engineers and banks started working together to open banks’ APIs to allow companies, most of which aren’t even banks, to connect to them in a standardized, single, unified format. Without getting too technical, these pipes are proprietary APIs that companies built to allow a developer to build any application it wants around that financial institution without a need for its own license. Pipe laying in the financial world is a big industry for providers like i2C and Synapse who are in the business of building these technical hookups for banks before reselling those relationships to other fintech-connected corridors. It’s good business for everyone involved because it allows each participant to perform their best function.

The bank capitalizes on its license and handles the traditional settlement and reconciliation component of bank operations, while another service like i2C uses that license to offer their technology product solution through their API to companies who need it.

Open banking connectivity is what allows a retail store to offer a debit card to increase the stickiness of its services in the same way Apple uses its debit card to meld people to their iPhones. It might have always been possible, but open banking now makes it easier than ever.

BaaS in the real world

Now that we understand open banking’s connectivity, we need to explore the other banking layers and how they can be recombined to create even more value. So in addition to the licensing stack and the API pipes, there are five more stack components — the payment stack, the core systems stack, data stack, regulatory stack, and the fraud stack. And that’s all on the backend before we even reach the customer facing UI part of a financial service we tap on our phones. Each of those stack components is a service that the licensing institution might already offer through its API in which case you’d need just one connection for every financial piece. However, rarely is that ever the case. And this is where the value-chain part of this article title starts to appear.

To illustrate, let’s describe how a service might connect to the payments stack when it’s not included along with the licensing institution. Because most API connections aren’t inclusive of the banking spectrum’s total stack functionality from licensing to the UI, a business might need to rent a desired stack component that’s missing through someone else’s API pipe.

For example, I might choose to connect to a bank because they’re really hands-off with my customers and they give me free rein to take on business customers in industries that another bank might not allow. However, my bank might not offer a payment stack with access to cross-border payments, something my business customers might really want. In that scenario I’d need to rent that cross-border remittance connection from someone else. Want a debit card if you don’t have a payments stack that already offers it? Then you’d have to go to one provider for cross-border access, and then another provider to issue a card on your behalf to capitalize on those lucrative card interchange fees.

These limitless combinations are the beauty of the plug-and-play open banking BaaS puzzle board we live within today, each enabled by these standardized API integrations.

Ten years ago, a company would have to hard-code each service tie-in to each new business it wanted to serve, a cost-prohibitive, burdensome, and knowledge intensive ordeal. Today’s collaborative BaaS approach affords unprecedented levels of value-creation by making it easier for FIs to work with previously unreachable parts of their own vertical markets and bring that financial functionality in-house.

Going deeper still, if everything up to the payments stack is the offensive, money making part of a bank, we can start talking about the myriad other monitoring stack components — -the core, regulatory, data, and fraud layers, as the defensive layers. Remember, there’s much more to money than sending and receiving it according to the law so these other security layers are necessary if you want to sustain your financial service.

Ever wonder how your transactions add and subtract perfectly to give you your daily balance? That’s the core telling your app to show that information. The core layer is just another word for a “ledger” which is a database tracking money movement and recording how it’s moving around.

If your licensing institution doesn’t offer access to their core, then in the fashion of our plug-and-play Baas construct you can rent a core from another company like mBanq as with any other part. Or, you can be like Arival and build your own core using container architecture if you have the in-house expertise. Proprietary components aside I can’t overstate enough how literally everything is for sale in the BaaS stack. And the same applies for the other security layers, too, because financial services and banks are legally obligated to search for suspicious activity in their payment networks, record that data, and consistently report any suspicious findings to state authorities. Banks might tie those other defensive layers into their stack using a Comply Advantage for anti-money laundering risk controls, Sentilink for behavioral fraud detection, or even elect to incorporate a reporting bureau like Experian.

The vast fintech landscape

Despite it being a landscape that can seem overwhelming to the uninitiated, no other industry affords value building in quite the same way as fintech. For me, navigating the fintech partnerships community is like shopping for innovative digital add-ons and using them to outfit Arival’s roadmap. What’s most interesting is that every season brings with it new, cutting edge, companies to explore.

To get a sense of how extensive the fintech landscape is for each part of the stack, just search fintech landscape to peruse the thousands of worldwide fintechs I strive to research a bit more about everyday. That way I’m aware of the solution that allows Arival’s customers to pay an invoice with their bank account rather than by credit card, even if it’s in a different currency from where our customer is located. For that there’s GoCardless. Need to send US dollars to Japan and avoid your bank’s 3% rate skim, then tie your service to AFEX and make it look to your customers like you’re converting at the spot rate using an embedded tool you built in-house. Need an AI tool to catch fraud, go use QuantaVerse. There are so many possibilities.

Even more esoteric, allow your customers to make deposits in crypto stablecoin through Wyre or front-load a year’s worth of software subscription revenue using Pipe automatically! And all these cool features are possible without ever picking up the phone and needing to sign a contract. So the next time you pay a bill, now you know more about how the vast interconnected BaaS ecosystem makes that possible.

TLDR

So to recap, we’ve learned about the BaaS spine that forms the structure of our financial ecosystem, open-banking’s API connection points, and why a business might want to hook into a bank. The malleable potential of BaaS’ interconnectedness that underscores this ability means a fintech’s value potential is directly related to the number of other services it can connect with. And just like the iPhone is a recombination of glass, circuits, and sensors in a way never before thought of before 2007, modern fintechs are taking us into their own future using the simple configurability potential of the BaaS stack. One day that value might translate to a world where neobanks become the incumbent threat to the traditional players. To that end, here’s to the building blocks of finance’s future.

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