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.
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