Banking as a Service (BaaS) enables licensed banks to harness the power of APIs, allowing them to integrate with outside businesses and provide them with banking infrastructure. This in turn allows third-party businesses to offer their customers personalized financial products.
Let’s break that down in a way that is relevant to Canadian credit unions.
No Bank License? No Banking Services
The banking industry is government regulated, requiring banks and credit unions to have a variety of licenses in order to operate. Banking regulation is especially stringent in Canada.
Within Canada, only chartered banks and provincially or federally regulated credit unions are permitted to offer essential banking services such as loans, deposit accounts, debit cards and other consumer financial products. Regulations are intended to reduce risk and protect consumers – but they also make obtaining banking licenses an arduous process.
Some unlicensed, non-banking businesses want to offer their customers financial services as it makes their business more attractive. This is where BaaS comes into play.
An Example Scenario
Let’s say a grocery store – a non-banking business – wants to offer their customers a debit card that also allows them to collect points toward purchases. The grocery store would have a unique advantage over their competition: increased customer loyalty and the ability to track the spending habits of their customers and change their marketing strategies accordingly. With BaaS, this is made possible.
Licensed banks or credit unions can partner with this grocery store, offering their banking infrastructure as a service for the store to use. Through API technology, the grocery store can build on top of the finished financial products of the licensed bank to offer their own debit card, deposit account, loans, etc. These financial products are white labeled by the grocery store to display their brand.
With this BaaS model, every player reaps the benefits. The licensed bank or credit union receives a new stream of revenue, as they can reach more customers and essentially rent out their infrastructure. The business (a grocery store in this case), can integrate customized banking tools into the customer shopping experience. Having these banking tools and the business’ products all within one ecosystem caters to the customer, maximizing the efficiency of their journey to making purchases. This satisfies the individual customers and their increasing demand for accessible and user-friendly digital banking services.
A Contentious Definition
This is one simplified model that would involve BaaS. There are many different configurations of BaaS, depending on what players are involved. With the evolution of neo banks and other platforms obtaining banking licenses, the BaaS stack can vary. Because of the variation, what is considered to truly be BaaS is often disputed.
The Future of BaaS and Canadian Credit Unions
BaaS is a newer concept that is on the rise in Europe, but uncommon in Canada. However, with the global shift towards consumer directed finance, individuals are seeking innovative digital solutions for their banking needs – which is what BaaS providers aim to fulfill. As Canada begins to change regulations surrounding personal finance data, Canadians may start to seek out more digital banking tools.
Whether you choose to participate in a BaaS model is dependent on your strategy as a credit union. Allowing your infrastructure to be used for white label banking provides your credit union with an additional source of revenue.
However, BaaS is a partnership model. If there are no businesses demanding the ability to offer financial products, then there is no opportunity to provide your infrastructure. And depending on the brand and location of your credit union, it may be difficult to find suitable businesses to partner with.
As of right now, it could be beneficial to simply wait and observe how BaaS emerges in Canada and alters the banking landscape. BaaS should not be underestimated, as it has the potential to become a large disruptor within the way Canadians consume banking products. But it is not a threat if treated as an opportunity. If you are curious on how to approach BaaS, spend some time doing further research for how it could apply to your credit union and keep an ear to the ground for possible partnership opportunities.
Interestingly, this banking model mirrors the characteristics and goals of credit unions, as it relies on partnerships and innovation in order to better serve individual consumers. So, while it is not yet prevalent in Canada, it is important to notice the presence of BaaS on the horizon, as it opens doors to new opportunity for licensed financial institutions, businesses and individuals.
