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[FinTech101] What is BaaS? How to cope with the challenges of regulators in the era of open banking?

Updated: Dec 27, 2023




In a time characterized by rapid technological progress and evolving customer demands, the banking industry is experiencing a fundamental shift. At the forefront of this transformation lies the emergence of Banking as a Service (BaaS). Through this blog, we will take a deep dive into the realm of BaaS, shedding light on its inception, examining its growing prominence, and delving into the factors that have propelled it to become a noteworthy trend in the year 2023.


1.     What is BaaS (Banking-as-a-Service)?

BaaS is based on the concept of Anything-as-a-Service (XaaS), also known as Everything-as-a-service. This idea started with Software-as-a-Service (SaaS) with cloud providers offering individual software applications.


While open banking and banking as a service (BaaS) are emerging as new forms of intermediation in the financial system, it portraits positive and negative externalities for the financial system. Both concepts – open banking and BaaS - refer to the use of open Application Programming Interfaces that enable third parties to build applications and services around a financial institution that exposes its data and/or its infrastructure. The use of these schemes represents a new form of intersection between data and finance, which is changing the way traditional products, services and customer experience traditionally work in the financial sector.[1]


In the context of the financial sector, despite many definitions that different regulators and financial institutions take, Open Banking is a phenomenon expected to grow in momentum in the next few years.[2] It is essentially the disaggregation and reaggregation of financial services so that these services can be consumed by, and at the same time offered with an additional value by third parties – partners, developers, FinTech, other banks, technology providers or whatever you want to call this trusted third parties – under certain operational standards.



2. When does people start talking about BaaS (Banking-as-a-Service)? When does BaaS raise up?

The risen of BaaS may come with numbers of market needs as well as opportunities from the matureness of technological development.


With rocketing development of FinTech in the aftermath of the 2007-2008 global financial crisis, attention of the market subsequently shifted to FinTech innovations (alternative finance, cryptocurrency and blockchain, machine-based methods for financial analysis and forecasting, including AI), as well as risk and regulatory issues. While more discussion on financial inclusion, the impacts arising from COVID-19, and the emergence of new business models with Banking as a Service (BaaS) became a key idea in the industry.


Here we can say, three main factors are the key to success of BaaS, including:

1) Digital transformation

Digital transformation and the widespread of cloud service enable automation and rapid scaling which allows consumption-based pricing.

2) Open banking adaptation

Open banking together with API-fiction allows distributors to natively embed their BaaS proposition into their experiences.

3) Social factors that create market needs

The mentioned social issues upraised customers’ need and expectation on the quality of banking, which drives demand for new FinTech and embedded finance experience.


Hence, in this blog, we are going to dig down into the reasons behind and what shall we bear in mind while adapting the integration of digital banking services into products or purchasing services offered by non-bank businesses.


3. Why does BaaS (Banking-as-a-Service) become a trend in 2023? What is the market potential and opportunities?


One of the most common disruption strategies across industries is unbundling, or the breaking up of incumbents’ business models to focus on one of its elements only. Fintech startups epitomise unbundling. For example, while incumbent banks offer numerous services ranging from current accounts to payments and from loans to investments, fintech startups are known to launch only one service. [3]

This trend is now entering its second stage. After perfecting their unbundled offerings, FinTech solution providers, like iFinGate, are expanding their service range, effectively re-bundling the business model. For example, in iFinGate, we provide AML/KYC services as a customized credit rating platform in a portal via cloud. Users may subscribe to the service on their demand which allows more flexibility to cater different needs of our clients.




4. What is the market potential and opportunities in Asia?

Believe it or not, FinTech solutions also comes with cultural difference.


Regarding to scholars, (Lanteri, A., Esposito, M., & Tse, T. ,2021) In the US and the UK, fintech startups used their initial services as a beachhead to attract customers and seem poised to become banks. For examples, the offers checking and saving accounts, looking at some transformation of Big4s will tell.

Looking into FinTech industry in Asia, they are mainly championing a different approach by leveraging cross-sectoral customer data to establish AI-powered business models that push the traditional banking borders through platforms referred to as super-apps.

This latter trend overlaps with the first trend mentioned above, re-bundling. Not only do these service providers offer their products and services to banks, but also non-financial companies (NFC). Like in iFinGate, we also provide AML/KYC services to different industry on their demand. For example, dealers in precious metals and stones are one of the end-users of our solutions to meet the upcoming regulations and registration system.

5. What should we consider and bear in mind in the era of BaaS?

When we talk about open-API, first thing that comes into our head might be the concern of data leakage. Yes, most of the new features justifies the importance of data protection. In the face of the benefit of FinTech, we shall also not to overlook the potential security risk.

Against this we argue that data regulation will have a transformative impact on the shape and structure of financial services, particularly in the context of data sharing and portability. If it is clear that Open Banking and data sharing are blurring the lines between financial services and other industries, we have to make sure the certain regulations towards the practice is sufficiently operating. [4]


6. How can regulators monitor the transaction and credit management with BaaS?

Many regulators are starting to think how to regulate open banking. Based on the preliminary findings of what the worlds knows so far as open banking, some scholars provide here some policy recommendations directed to produce better regulatory frameworks for this matter.

Saying that BaaS could be defined as a banking business model which enables interface providers to act as intermediary for the transactions of the clients through their interfaces and service banks by connecting to the services through open banking services, here are two key-takeaways for you to know about some principle when applying solutions from vendors in a secure manner. [5]

Firstly, it should be prohibited of any misleading expressions and requirement for transparency. It is crucial for interface providers to act in a transparent manner when providing their services.

Furthermore, contractual requirements shall be considered as a compulsory practice. A contractual relationship must be established by and between each one of these parties. In addition, the requirements to be included in the agreements and the obligations of the parties are defined as follows. Such saying includes agreement between service bank and the customers; between service bank and interface provider; and between interface provider and customer.

In this era of BaaS, where technological advancements and customer expectations converge, regulatory oversight remains a cornerstone. It enables the industry to harness the benefits of BaaS while safeguarding against potential risks, paving the way for a future where innovation and compliance go hand in hand.

As one of the service providers on AI KYC/AML solution, we always put client’s privacy on the first place and take cybersecurity seriously. To explore how RegTech with AI can seamlessly integrate into your compliance process and provide the best solution tailored to your business model, take advantage of our offer for a FREE DEMO and discover the transformative potential of our customized RegTech solutions.

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[1] Remolina, N. (2019). Open banking: Regulatory challenges for a new form of financial intermediation in a data-driven world. SSRN Electronic Journal.

[2] Deloitte Consulting LLP. (2021). Banking as a Service, Explained: What it is, Why it’s Important and How to Play. 

[3] Lanteri, A., Esposito, M., & Tse, T. (2021, January 19). From fintechs to banking as a service: global trends banks cannot ignore. LSE Business Review.

[4] Remolina, N. (2019) Open banking: Regulatory challenges for a new form of financial intermediation in

a data-driven world. 1-57. Available at:

[5] Hanten, M., Nalbantoglu, L., Polat, Y., & Tumer, B. (2022). Digital Banking and banking as a service– a comparison of Turkish and European law. SSRN Electronic Journal. 

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