Banking as a service is democratizing the lending ecosystem

With new-age FinTech and non-financial firms on a spree to offer intuitive financial services to customers, BaaS is a tool that helps integrate fundamental financial information from the banks to their platforms through APIs.

The lending problem is real. To scale loan growth and manage risk in the lending process, financial institutions are exploring ways to get rid of inefficiencies and inconsistencies.  Today’s lending environment calls for a great deal of process automation. Additionally, by giving traditional banks and FinTech companies secure access to data, API technology can assist in resolving this issue. BaaS (Banking as a Service) solutions allow both parties to collaborate on new ways of doing business, like the backend as a service for web apps, especially when it comes down to lending.

BaaS forms the middle layer between traditional banks and FinTech, as well as non-banking businesses. BaaS solutions such as crypto lending platforms are solving the lending problem by offering loans at lower rates than banks offer through their platforms or business models. BNPL instruments are one of the most popular instruments that offer interest-free short-term loans. These services are forecasted to generate $680 billion in transactional volume by 2025.

Modern Financial Instruments Serve Niche Clientele

BaaS facilitates small businesses and entrepreneurs’ access to capital. It also helps investors get easy access to funds for their projects while giving them an avenue for funding innovative BaaS platforms.

The traditional banking model has been challenged by the rise of FinTech companies such as PayPal, Stripe, and Square that offer alternative ways of managing financial transactions online without relying on legacy financial infrastructure, as they enhance user-friendliness with an improved user experience (UX).

Customers inclined towards mobile banking are naturally the best target for embedded finance, as it saves them the hassle of switching between apps. They can also benefit from BaaS solutions, given the motivation of inclusive credit from their usage history of the specific app, such as airline ticketing or an online food delivery platform. Not just for customer-facing apps, embedded finance has also transformed the B2B settlement experience, with only one-fourth of the settlements now occurring in cheques.

Need to Relay Data Between Traditional Banks and FinTech

Banks often don’t have the data they need to make well-informed lending decisions, and they can’t easily access data from FinTech. In this scenario, the solution is for banks to partner with new partners (a.k.a neo banks) to share their data without needing access to third-party systems. The result is a more efficient online lending platform that saves time and money for both sides of the equation.

As mentioned earlier, BaaS is a layer between the traditional bank and FinTech. This intermediary layer renders the sharing of data between both parties, which allows them to offer loans and financial instruments such as debit and credit cards. The craze for open banking is pushing this case forward. Alternate data is being leveraged to improve credit scoring without impeding privacy, which is owed to the BaaS layer. The alternate data from social media and ecommerce platforms helps create customer personas that are more realistic in assessing their credibility.

Collaboration is Good for Both Business and Customers

There needs to be a mutual relationship of trust among banks and their FinTech partners because:

  • Bank customers’ financial data is being shared across FinTech businesses.
  • FinTechs also don’t want their sensitive financial information stolen or used against them in a way that could put their business at risk.

Providing FinTech to operate without stipulated banking licenses has created a lot of spur in the industry owing to the security aspect. But these regulations have become more robust to ensure that data visibility is limited to authorized institutions. The efficient data relay between firms has empowered customers to avail modern services with the IT backing of FinTech for the BaaS backend as a service for mobile apps and the banks’ trust. Nearly 43% of the banks are inclined towards charging a fee for every API transaction, which can create new revenue streams.

This collaboration has led to better customer experiences and less friction within each party involved. This also makes it easier for all kinds of businesses, not just traditional lenders but also start-ups looking for funding. As a result, it will lead to more opportunities for everyone with greater financial planning capability.

More Transparency for Gaining Trust

Transparency is a big part of building trust, especially in lending. It’s also an essential part of building a community and brand, two things you need to succeed as a business. And finally, transparency helps build your reputation as someone willing to support others with their monetary troubles; that’s precisely what open banking enables

Democratizing finance with a DeFi lending platform makes it easier for people with low incomes (or no income) to borrow at reasonable rates from individuals without having to deal with high fees or minimum credit requirements. Even the need for collateral is bypassed by assessing the revenue-generating potential of clients, be it SMBs or individuals, to simplify their lives. Clients of all statures can now manage their finances seamlessly, including their EMIs and various other payments, through the user-friendly front-end of banking apps via FinTech.

BaaS Is Helping Create Novel Financial Solutions

BaaS can help solve the lending problem by bringing traditional banks, FinTech, and non-financial firms onto the same infrastructure. Traditional banks are now expected to launch their own BaaS APIs, allowing FinTech to leverage the IaaS of legacy systems for better customer servicing. This will help in scaling up sales while also enhancing customer retention.

The lending problem is pressing for banks, FinTech, and their customers. The traditional banking system cannot meet its customers’ demands since it only focuses on providing loans backed by collateral. FinTechs have tried to solve this problem by offering more flexible payment options than banks. Still, they haven’t been able to get their product into the mainstream market because they don’t have access to enough data or information about the consumers from whom they’re trying to borrow money.

BaaS platforms are currently working on solving both issues by partnering with traditional banks and FinTech companies so that both sides can access more data than ever before while also allowing those businesses to have better control over how that data is used or exchanged between them.

Contact us for the right solutions if you are a part of a progressive business looking to benefit from BaaS’s backend services.

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