To meet the increasing need for embedded finance, financial institutions are increasingly offering banking as a service (BaaS) products and services — typically developed by trusted third party vendors and empowered via application programming interfaces (APIs)

The pressure on banks and credit unions to offer more innovative and user-friendly products and services emanates from the growing number of nonbank companies offering financial services, such as digital financial accounts, wallets, payments, and lending.

Tech knowledgeable legacy financial institutions can ward off the invading threat by allowing BaaS providers to share their information and structure easily and securely.

BaaS permits financial institutions and other third parties to connect with banking systems directly via APIs to create financial offerings over the bank or credit union’s regulated and licensed infrastructure, while also liberating some open banking concepts currently infiltrating financial services.

Allied Market Research held the global banking-as-a-service market generated $2.41 billion in 2020, and projects it to reach $11.34 billion by 2030.

Banking-As-A Service Headed to Financial Institutions

Banking-as-a-service allows non-banks to offer core financial services to its customers by integrating with financial institutions via APIs. Non-banks (like fintech and even non-fintech businesses) build products on top of the traditional banking infrastructure. By embracing BaaS traditional financial institutions can also embed finance and BaaS services presented to retain customers and increase their significance by offering a better experience.

Finastra’s “Financial Services State of the Nation Survey 2021,” surveyed 785 global financial institutions and found eighty-five percent of respondents at global financial institutions believe BaaS will make an impact over the next year; 40% believe the impact will be significant.

The Finastra study also found 81% of financial institutions see BAAS as a means to grow business, enhance their distribution channels, shorten time to market and streamline operations.

Many banks and credit unions are adopting the idea of consumer empowerment by delivering a seamless experience enabled by open finance and BaaS, which allows them to share financial data across financial solutions, products and platforms. The Finastra survey found 78% of respondents believed shared data and infrastructure will become the norm across the industry.

APIs Unleash BaaS

Many traditional financial institutions still operate outdated pieces of legacy systems — including core systems — that are not compatible with modern fintech. This can be a big issue in implementing the BaaS model as it would normally hinder third-party integrations.

In order to modernize they must tap into an extensive variety of banking enablers helped extensively by open application programming interfaces. Some APIs link users to their banking information, and allow them to experience newer banking products and services within the traditional banking systems.

Finextra defines open banking as exposing features of financial products as APIs, whereas banking-as-a-service uncovers banking products completely in the form of an API. The functionality therefore enclosed in open banking APIs serves as a small subset of the functionality needed by a BaaS API.

The BaaS platform itself ensures safe communication of data between the traditional bank and a business/fintech company. This level is also known as the ‘middleware’ or ‘banking as a service’ layer, according to a white paper, “Overview of APIs and Bank-as- a-Service in Fintech.”

In return deploying BaaS can not only help financial institutions generate revenue but also save by not needing to devote funds toward tech development.

Fintechs, APIs and BaaS

Opening up a financial institution through APIs is no minor achievement. Producing an API approach should center on ease of integration and the capability to deliver maximum business value. The operational processes and business capabilities need optimum exposure. In this scenario the API-based BaaS layer requires constant monitoring to enable secure operation.

The new breed of third-party APIs frees developers from locking to any particular platform and allow them to bring their applications more efficiently to market. They can also benefit from partnerships that already have access to ready-made solutions.

Consequently, developers can focus on their particular specialty and surround it with fully functional, distributed processes developed by other specialists, which they access through APIs. Another advantage is third-party APIs generally work better and provide more flexibility than internally built APIs. Third-party API developers in fact have more volume and access to a larger data set that creates significant network results.

There exists widespread agreement by global financial services institutions that fintech collaboration has made their businesses more efficient, has been a driver for success, and that the benefits of collaboration outweigh its costs; according to 80% of Finastra survey respondents.

Collaboration remains important to 94% of financial services institutions, according to these Finastra respondents though there remain several existing and new barriers surrounding regulation, security, and technology. Adopting BaaS business lines, usually distributed to clients via APIs, requires strong risk and compliance management of the embedded fintech partner.

Many questions remain about the security of BaaS. While open-banking APIs enable financial institutions, vendors and fintech companies to share data there are still valid concerns over the safekeeping of information passing through them. Issues such as apprehensions related to cloud security and a surge in cyberattacks are also important to study when entering the open-banking/BaaS API marketplace.

NXTsoft’s API connectivity provides a best-of-breed connectivity solution for financial institutions and fintechs. With the solution, financial technology suppliers can close deals quickly with pre-built API integrations into so many existing applications. Financial institutions and vendors can take advantage of NXTsoft’s experience connecting fintech solutions securely to banks and credit unions, using the strongest technology foundation and the most cutting-edge cloud-based technology; and following the uppermost industry and regulatory standards.

NXTsoft’s vendor agnostic OmniConnect Platform, the premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions, ensuring that NXTsoft clients have the most secure and reliable integration environment in the industry. OmniConnect provides the access needed to the financial institutions information, removing integration obstacles and providing a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems. Headquartered in Birmingham, Ala., with offices in Atlanta, Orlando and Denver, NXTsoft currently services over 700 financial institutions with 2,000 connections in place.

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