Guides and reports

What is banking as a service and how to choose the right provider?

Platforms can meet the financial needs of small and medium-sized businesses through banking as a service (BaaS). Discover what BaaS is and how it can help you drive revenue and loyalty.

August 2, 2023
 ·  7 minutes
Woman sitting in front of laptop

Platforms and marketplaces are reshaping the financial landscape for small and medium-sized businesses (SMBs). Today, they can provide their SMB users with financial services that only banks have traditionally offered, without becoming a bank themselves. This is all thanks to banking as a service (BaaS). 

BaaS lets platforms integrate financial services into their offerings. This integration is in high demand. In 2022 alone, 64% of SMBs wanted platforms to offer business accounts, cash advances, and issued cards to fill the gap left by banks. This is because banks tend to take a one-size-fits-all approach that’s not well suited for companies with smaller margins, leaving SMBs underserved. 

With BaaS, platforms can now cater to the dynamic needs of SMBs. And they’re better suited to do so. They can leverage the relationships they’ve already nurtured with their SMB users and their in-depth understanding of user challenges to deliver highly tailored and efficient solutions.

What is banking as a service?

BaaS is a financial technology solution that lets non-bank businesses, like platforms and marketplaces, directly offer services that were traditionally restricted to licensed banks. These include bank accounts, cards, and loans. 

BaaS providers facilitate this setup. They supply the underlying technology stack and licenses needed to offer banking services and embed them into a business’s core offering, brand, and existing interface. They also handle compliance, risk, and know-your-customer (KYC) requirements.

What does BaaS mean for platforms?

Platforms can use BaaS to extend their offering by embedding financial services seamlessly into the processes they already facilitate for SMBs, creating a single interface for users to manage all their business operations. Platforms can then focus on the user experience while their BaaS provider handles the banking technology and regulatory compliance.

Whether you’re a software-as-a-service (SaaS) platform or a marketplace, you already offer crucial business solutions to your users. Adding financial services supercharges your core offering and makes you a one-stop hub. Your users no longer have to rely on third parties. They can get a consolidated view of their sales activities, transactions, accounts, and business loans on your platform. And you can monetize recurring revenue, like subscriptions, and improve retention.

How will BaaS benefit your platform?

Financial services will enhance your product offering, attract new users, create a stickier service, and open up untapped revenue streams.

Your users gain valuable time by running all their business operations and financial management in one place. Your platform can provide bank accounts, payment cards, and working capital that are tailored to meet their needs, without the complexity of legacy banking systems. 

As you offer innovative solutions, the challenge of attracting new users becomes less daunting. Providing a wider range of services, including financial ones, makes your offer more compelling. 

Equally important, the more users need your platform for crucial business processes, the less likely they are to churn. As you retain more users, you also drive value for your business by increasing customer lifetime value and lowering customer acquisition costs.

Embedded finance also opens up new revenue streams. You can monetize on payment processing fees, lending, and interchange fees, getting your hands on an estimated $110 billion market opportunity in the US, UK, and Europe alone.

Finding the right BaaS provider

In the current landscape, you can embed banking functionalities in three ways. You can deal directly with financial institutions, work with an aggregator as an intermediary, or work with a full-stack BaaS provider.

Working with financial institutions

Going straight to the source may seem logical for a platform because you cut out intermediaries. But remember back when the payments landscape was fragmented, overly complex, and suffered from slow processes? 

You’ll likely encounter the same problems if you work directly with traditional financial institutions to embed financial services. Their digital transformation is slower and they often lack the needed technology stack, making it harder to innovate tailored experiences for your users. 

And the complexities are multiplied if you’re operating globally. For example, if you set up embedded finance in the US and want to expand, you’ll need to find another banking partner and comply with different local regulations. This in turn will affect your speed when entering new markets due to the additional operational lift.

Working with aggregators

Embedded finance is becoming attainable for more platform businesses thanks to aggregators. Aggregators are BaaS providers partnering with banks to offer one or more banking functionalities. They own the financial technology layer needed for platforms to integrate banking services. 

The thing is that aggregators need to work with traditional financial institutions to leverage their banking licenses and infrastructure. That dependency adds latency to money movement. 

For starters, an aggregator’s service level depends on banks. When an error occurs, aggregators work with banks to troubleshoot. This in turn will slow you down when solving issues for your users.

What’s more, aggregators must meet the requirements set by external policymakers (in this case, banks) because they aren’t the decision makers. These requirements differ from one bank to another, which could mean different risk thresholds and documentation needed from SMB users. This inconsistency limits the service level your platform can provide and the users you can work with. 

Finally, many aggregators don’t offer all the banking functionalities that platforms need, leaving platforms in a fragmented situation as they work and integrate with multiple aggregators.

Working with a full-stack BaaS provider

There’s a better way to set up embedded finance on your platform. Using Adyen’s single financial technology platform as the full-stack BaaS provider gives you more than the end-to-end infrastructure. You gain the reliability and flexibility that will save you and your users valuable time and money.

  • Regulatory reliability

From risk management to balance sheet optimization, you need to trust that your embedded finance partner is fully compliant and up to speed with local regulations. Because our own banking licenses are part of our full-stack solution, compliance is built in. You can rely on us as a tech-led bank to meet regulations while ensuring speedy innovation. You can set up, launch, and scale quickly when working with us, remaining fully compliant with the latest requirements. 

  • Global scalability

Aggregators who want to offer a global service need to work with multiple banks and card providers around the world. For platforms, this may mean keeping up with different KYC requirements and it can limit their product offerings across different regions, putting additional strains whether in terms of operational costs, or opportunities to expand into new markets.

Our full-stack solution works on a global scale. You gain access to markets we already operate in as well as new ones as soon as we add them to our offering. And this is all within the same banking infrastructure. So you can have consistent product offerings, no matter where your users are located.

  • Fast innovation and agile growth

Innovation is faster when third parties don’t weigh you down with turnkey solutions. We have full control of our in-house solution so you can speed up your product development and differentiate your offering from your competitors by catering to your users more efficiently. You can also tailor products and features according to your users’ needs, all within the same platform to stay safe from fragmentation.

How Adyen can help

Platforms need to forge the right partnerships to provide reliable, compliant, and flexible financial experiences to their users. 

You can choose from our repertoire of solutions depending on your business model and user needs.

  • Accounts: Offer branded business bank accounts to your platform users so they can get instant access to funds.

  • Capital: Generate a flywheel effect by offering your platform users access to fast and flexible cash advances so they can fuel their growth and in turn yours.

  • Issuing: Offer physical and virtual payment cards with your branding and let your users immediately spend incoming funds from their cards. 

Ready to take the next step for your platform? Get in touch.

Fresh insights, straight to your inbox

By submitting your information you confirm that you have read Adyen's Privacy Policy and agree to the use of your data in all Adyen communications.