The BaaS 5: The Five Most Important Characteristics of a BaaS Provider
By Angelos Anastasiou, Head of Transaction Banking Solution Architecture
Forward-looking businesses across all industries see enormous potential in embedding financial services in their products. Relationships with customers increasingly include financial interactions, which can increase Total Addressable Market (TAM) and deepen existing customer ties. Adding financial products is not without its hurdles, and businesses realize that they need a strong financial industry partner to help them succeed in this emerging banking as a service (BaaS) ecosystem.
At Goldman Sachs Transaction Banking (TxB), we’re fully committed to embedded finance. From the start, we knew our technology platform should be conducive to BaaS innovation. We knew we had to adopt a modern and scalable cloud-native architecture and create a full suite of APIs to enable the financial cloud. But the technological component of BaaS is only part of the story. In fact, BaaS is both in TxB’s DNA and at the core of our go-to-market strategy and technology platform.
We believe there are five key characteristics, known at TxB as the BaaS 5, that businesses could benefit from having in a BaaS provider and partnership.
1. Balance Sheet
A BaaS provider needs to have a large balance sheet combined with a diverse set of businesses to effectively support its partners and their clients. Embedded finance solutions require the BaaS provider to handle customer money, which means the provider must be willing and able to scale up as the deposit base grows. Not all BaaS providers can support a large customer base, especially in a world of constrained balance sheets.
2. Global reach
Companies with a global customer base need a BaaS provider that can support global embedded finance solutions. But even large financial companies with cross-border branch networks may lack consistency in the services they offer in different locales. These banks often have evolved financial products independent of one another in different geographies, which presents a challenge for a BaaS partner trying to work with its provider to create a globally consistent customer journey.
3. Built-in regulatory, risk and legal expertise
Embedded finance introduces a certain distance between the end user of a financial product and the BaaS Provider. This means the BaaS provider must have appropriate legal and compliance frameworks to manage risk without introducing friction into the end-user transactions. The relationship between the BaaS provider and the BaaS Partner introduces many legal and compliance obligations that must be jointly met. These range from know-your-customer (KYC) rules and anti-money-laundering (AML) and anti-fraud regulations, to more subtle requirements. Implementing effective controls at multiple client touchpoints is hard, but doing so in a way that doesn’t complicate the BaaS offering or the integration is even harder.
4. The necessary technology
Technology will bring the full promise of embedded finance solutions to life, such as a rich set of vital APIs to expose core financial capabilities in a modular and flexible way. What’s more, consumers and corporates now expect real-time functionality that is always available and easy to integrate with. The BaaS provider’s system must be built to deliver this—in much the same way that electric utility service is expected to never go offline. Along with resilience and availability, security is important too. And finally, the BaaS provider’s technology needs to be flexible, as every company and digital platform has a unique set of customers with varied needs and challenges. TxB implements this all of the above approach, and our API-first products are designed, configured and built in ways that enable our partners to both make good use of existing functionality, as well as innovate and build entirely new functionality.
5. BaaS DNA
This final pillar of our BaaS Five is about the culture of the organization that offers embedded finance services. Entering a partnership with a financial institution to enable embedded finance solutions is a decision that should not be taken lightly. This needs to be a partnership for the long term. It can have a profound impact on growth, and thus the BaaS provider organization needs to be fully committed to embedded finance as an organizing principle, not an afterthought. The right provider will have a team of experts steeped in embedded finance. Moreover, it will have not only technology that’s purpose built for the embedded finance ecosystem, but also an organizational design that’s dedicated to the implementation of and support for BaaS solutions.
For our white paper on the evolution of the BaaS model, and with more detail on the BaaS 5, click here.
Want to learn more?
Transaction Banking services are offered by Goldman Sachs Bank USA (“GS Bank”) and its affiliates. GS Bank is a New York State chartered bank and a member of the Federal Reserve System and Member FDIC, as well as a swap dealer registered with the CFTC. It is a wholly-owned subsidiary of The Goldman Sachs Group, Inc. (together with its subsidiaries, “Goldman Sachs”) and leverages the resources of Goldman Sachs subject to legal, internal and regulatory restrictions. Information contained herein does not constitute an offer by GS Bank or any of its affiliates. The receipt of this document by any recipient is not to be taken as constituting the giving of financial, investment, tax, legal or any other advice by Goldman Sachs to that recipient, nor to constitute such person a client of Goldman Sachs. No person shall be treated as a client of Goldman Sachs, or be entitled to the protections afforded to clients of Goldman Sachs, solely by virtue of having received this document. No part of this material may, without Goldman Sachs’ prior written consent, be (i) copied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Subject to FDIC rules, regulations, and limitations. For more information on how FDIC insurance coverage works visit www.fdic.gov. © 2021 Goldman Sachs. All rights reserved.
This document is confidential and may have been prepared by personnel in the Investment Banking Division or one or more affiliates of The Goldman Sachs Group, Inc. ("Goldman Sachs", “We” or “us”) and is not the product of the Global Investment Research Division. It is not a research report and is not intended as such.
Non-Reliance and Risk Disclosure: This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of our clients and the terms and conditions of any transaction if between us, if any were to take place, would be subject to further discussion and negotiation between us. It does not constitute a recommendation and may not take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. This material is for the general information of our clients. The material is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such and Goldman Sachs shall not be responsible for errors or omissions that may occur. We will not update or amend or be obligated to update or amend such information following the date it was delivered to you. Goldman Sachs shall have no liability, contingent or otherwise, to any recipient or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of, or otherwise in connection with, any information provided to you. Opinions expressed are our current opinions as of the date appearing on this material only.
Phone Recording: Telephone conversations with Goldman Sachs personnel may be recorded and retained.
Receipt of Orders: An order sent to Goldman Sachs by email or instant message is not deemed to be received by Goldman Sachs until a Goldman Sachs representative verifies the order details with a phone call to the client or acknowledges receipt of the order via email or instant message to the client. Goldman Sachs does not accept client orders sent via fax or voicemail systems.
Full Service Firm Disclosure: As you know, Goldman Sachs is a full service financial institution engaged, either directly or indirectly, in a broad array of activities, including trading, commercial and investment banking, financial advisory, market making and trading, investment management (both public and private investing), investment research, principal investment, financial planning, benefits counselling, risk management, hedging, financing, brokerage and other financial and non-financial activities and services globally. In the ordinary course of their various business activities, Goldman Sachs and funds or other entities in which Goldman Sachs invests or with which Goldman Sachs co-invests may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of customers and clients. In addition, Goldman Sachs may at any time communicate independent recommendations and/or publish or express independent research views in respect of such assets, securities or instruments. Any of the aforementioned activities may involve or relate to assets, securities and/or instruments referred to herein. In addition, Goldman Sachs may provide investment banking, commercial banking, underwriting and financial advisory services to such other entities and persons.
Legal Entities Disseminating this Material: This material is disseminated in the United States of America by Goldman Sachs & Co. LLC (which is a member of FINRA, NYSE and SIPC) and by Goldman Sachs Bank USA. You may obtain information about SIPC, including the SIPC brochure, by contacting SIPC (website: http://www.sipc.org/; phone: 202-371-8300).
Not a Municipal Advisor: Except in circumstances where Goldman Sachs expressly agrees otherwise in writing, Goldman Sachs is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 15B of the Securities Exchange Act of 1934.
Not a Fiduciary: This material is provided solely on the basis that it will not constitute investment advice and will not form a primary basis for any person’s or plan’s investment decisions, and nothing in this material will result in Goldman Sachs becoming a fiduciary with respect to any person or plan. Further, each recipient has the capability to independently evaluate investment risk and will exercise independent judgment in evaluating investment decisions in that its investment decisions will be based on its own independent assessment of the opportunities and risks presented by a potential investment, market factors and other investment considerations.
Some Transaction Banking accounts and services are subject to customer eligibility requirements and may not be available in relation to accounts held at in certain jurisdictions on in relation to third-party banks. © 2021 Goldman Sachs. All rights reserved.