Tearsheet Buyers Guide: Banking as a Service (Part 1)

Overview

This is the first article in a content series Tearsheet will publish on Banking as a Service. Click here for part 2 and part 3.

We're starting by defining the industry and the various terms you'll need to know to learn more. Later in the series, we'll publish on the influential companies and technologies making an impact in banking as a service.

Introduction

One of the major themes we’ve been exploring is the evolving delivery of financial services. With the move towards open banking and APIs, finance is literally everywhere. You no longer need to go to a bank to conduct banking activities. Users can save money, move money and invest money through all kinds of other apps. Most modern debit cards, when paired with a cool app, offer much of the functionality of traditional banks.

Empowering the move to make financial services ubiquitous is a set of technologies called banking as a service. BaaS, as it’s known in the industry, is a quickly growing industry made up of legacy and new players. Tearsheet’s BaaS Buyer’s Guide is our attempt to organize and explain this exciting space.

Why we decided to do this series

Throughout our reporting on data aggregation and Challenger Banks, Tearsheet realized how quickly BaaS has come onto the scene and is making significant changes in how fintech firms and non-fintechs launch new banking products. We wanted to cover this new and soon-to-be critical piece of the banking world.

Additionally, similar to data aggregation, there is no literature which provides a comprehensive guide on the industry players, what they do, who they partner with, and deeper information which can save significant research time for any company interested in building a financial product.

Incidentally, in talking with a fintech to help it find the right provider, it became clear how confusing it could be for companies to do the research. So, Tearsheet put together a guide by conducting exhaustive research on the industry to help readers approach this market more easily.

Who can use this guide

Getting a banking license is hard. Massive companies like Walmart, and capable fintechs like Square have struggled in their attempts to get a bank license. Even with the advent of specialized fintech licenses, the learning curve to secure a bank license, along with the ongoing compliance and other related obstacles, make it very difficult for any company to quickly roll out a fintech app or banking features.

Therefore, we’ve identified two types of readers who would find this guide especially useful: fintechs and established technology companies.

Fintechs: Fintechs need to move quickly while limiting their cash burn. BaaS enables fintechs to provide or model their product around these banking services easily and inexpensively.

Established technology companies: With companies like Uber and Apple offering banking services, many established startups have started looking into offering banking services to their current clients. Getting a bank license is an onerous task, and the fast moving startups do not want to lose focus on their core product while navigating the complex banking world.

Drawbacks to legacy players

Slow moving: In an age where speed is of critical importance, fintechs need to move quickly — an additional month or even years spent in development can be potentially catastrophic. Depending on the use case, the time it takes to launch a banking product can range from a few days to a few months for BaaS, versus years for legacy systems.

Limited customization and features: Since legacy players that provide technology to banks and credit unions are very big, change comes slowly. As legacy systems have a large customer base, they have much less incentive to develop customized features for a specific client or use case.

On the other hand, BaaS companies typically work with a limited number of partners, and work closely with them to custom develop new features. Once these features are developed for one company, the feature is generally rolled out for others to use as well. BaaS systems are also built with customization in mind, making it much easier and less costly to work with them.

Click here to download Tearsheet's BaaS Buyers Guide