Tearsheet Buyers Guide: Banking as a Service (Part 2)

This is the second part of our introduction to Banking as a Service. Click here for part one and part three.

The different definitions of BaaS and how Tearsheet defines BaaS

Our definition of Banking as a Service: We’ve defined BaaS as the ability to provide any and all components needed to launch a bank or banking products. Because we see API Banking (which typically includes use of a banking license) as a critical component in offering banking services, we’ve decided to include only players who offer this service.

This is not to say, however, that we do not consider CORE Banking and others as BaaS -- we just think it is too narrow for our series. Furthermore, a company which utilizes API Banking won’t need a CORE system (although the company delivering the services will probably utilize CORE to deliver their APIs).

Although none of the players we’ve spoken to provide most of their services in-house, almost all of them have created partnerships and collaborations which make it easy for their clients to access all required features.

API Banking: In line with our definition of Banking as a Service, we will only be covering BaaS players that offer banking services delivered by API. Oftentimes, these services also include many other services integrated as well, eliminating the need for the fintech or bank to search for software.

Since there are significant differences between the US and the UK/EU market, we will first focus on the US side and cover the UK/EU market in a later series.

BaaS CORE Banking: There are so many great core banking providers out there, and we’ve spoken to a few of them. Core banking, however, is not what we are going to be focusing on for this series.

BaaS CORE banking uses middleware of existing core (such as Fiserv, Jack Henry, FIS) and builds a software layer on top of these legacy systems to make it easier for a company to use internally. CORE can include more advanced features, too. Some advanced functionality includes card controls (such as card freezing), real time transactions, and children’s account management.

White Labeling: As challenger banks add lots of new customers and represent formidable competition to incumbents, community and regional banks are looking for solutions to improve their user experience by providing a better interface, more features, and a generally better user experience on par with fintechs. Examples can also include a mobile app, a PFM, and more. White label solutions allow a bank to essentially skin a turn-key digital offering with their own branding.

What do Open Banking and BaaS have in common?

“Open Banking is a system that provides a user with a network of financial institutions’ data through the use of Application Programming Interfaces (APIs),” according to Investopedia. The similarities between Open Banking and BaaS would be the use of APIs to communicate data and functionality. These APIs enable fintechs with limited resources to focus on their own products and not get distracted by the complexities associated with integrating new banking functionality.

How is BaaS different than Open Banking?

Although very similar in theory, BaaS is different than open banking in a few fundamental ways. From a functionality perspective, open banking allows read access, while BaaS allows write access. So a personal finance app may want to use open banking to enable users to view their spending activity on the app, while BaaS would allow the PFM to offer checking accounts to users.

Click here to download Tearsheet’s BaaS Buyers Guide