The rise of scalable services delivered online has completely transformed entire industries. Take Software as a Service (SaaS), for example—it’s revolutionized access to technology by removing the need to build infrastructure from scratch and helping businesses quickly adapt to changing market demands. This same concept has made its way into the financial sector through Banking as a Service (BaaS), which has been redefining how financial services are designed and delivered. It allows third parties to offer banking products without needing to be banks themselves.
This shift raises a key question: is BaaS an opportunity for traditional banks to expand their reach, or does it threaten their business model? In this article, we’ll explore how BaaS is reshaping the financial landscape, the risks and benefits it brings, and the strategies traditional banks can use to stay competitive in this fast-changing market.
What is Banking as a Service (BaaS)?
Banking as a Service (BaaS) is a model that enables third parties—like fintechs, tech startups, or large companies—to offer financial services by leveraging the infrastructure and licenses of traditional banks. Through API-based platforms, banks provide core services such as accounts, payments, and loans, which these companies seamlessly integrate into their own digital solutions.
This approach not only makes financial products more accessible but also accelerates innovation within the industry. Non-banking companies can create personalized services that meet the specific needs of their users, while traditional banks generate revenue from their infrastructure and expand their reach to customers who might not otherwise be on their radar.
Risks and benefits of Banking as a Service for traditional banks
The Banking as a Service (BaaS) model has introduced significant changes to the traditional financial sector. Below, we outline the risks and benefits this model presents for banking institutions.
Benefits of Banking as a Service for traditional banks
- New revenue streams: Banks can generate additional income by licensing their APIs and monetizing their existing infrastructure without having to develop end-user products.
- Optimizing existing assets: BaaS allows banks to maximize the use of their licenses and systems, leveraging their banking infrastructure through a scalable model.
- Business model diversification: By adopting the BaaS model, banks can complement their traditional income streams with revenue from providing services to third parties.
- Strengthening their role in the financial ecosystem: Becoming an essential provider for third parties reinforces the position of traditional banks as key players in the financial system.
Risks of Banking as a Service for traditional banks
- Banking disintermediation: By enabling third parties to interact directly with customers, banks risk losing control of the end-user relationship, potentially diluting their brand and value proposition.
- Increased competition: This model opens the door for non-banking entities to enter the financial sector, intensifying competition in key areas like payments and lending.
- Regulatory risks: Traditional banks remain responsible for meeting strict regulatory requirements, even when services are offered by third parties, which could increase their exposure to penalties.
- Technology and security dependence: API-based infrastructure requires ongoing investments in cybersecurity and technological upgrades, posing challenges for banks with older systems.
Traditional banks that have adopted the BaaS model
Here are some examples of traditional banks that have embraced the Banking as a Service (BaaS) model:
- BBVA: BBVA has been a pioneer in implementing the BaaS model, offering its BBVA Open Platform in the United States. This platform allows businesses and fintechs to integrate financial services such as accounts, payments, and card issuance directly into their applications using BBVA’s APIs.
- Solarisbank: Although relatively new, Solarisbank is a prominent example of a BaaS provider in Europe. It holds its own banking license and offers financial services to third parties through APIs, enabling other companies to design customized solutions without needing their own license.
- Santander Bank: Through its subsidiary Openbank, Santander Bank has implemented a digital platform offering advanced financial services using cloud infrastructure and technologies such as artificial intelligence and machine learning. Openbank has expanded its operations to several European countries and recently announced its launch in the United States.
How can traditional banks compete in this landscape?
In a market where the Banking as a Service (BaaS) model is gaining ground, traditional banks that choose not to adopt it must implement strong strategies to remain competitive and relevant.
Adopt a Customer-Centric model
Traditional banking is shifting toward a customer-centric model, where strategies are designed to meet users’ needs and expectations at every interaction. This shift reflects a profound transformation in customer behavior, as people no longer compare their banking experiences solely to those offered by other banks but to those of leading brands in technology, e-commerce, and entertainment.
In this context, banks must adopt a strategic approach that prioritizes personalization and delivers seamless experiences across all channels. This includes the ability to anticipate customer needs through data analysis and offer targeted solutions that address real problems.
Moreover, banks that combine personalization with proactive service can foster deeper relationships with users, built on trust and credibility. This not only enhances customer retention but also unlocks new opportunities for cross-selling and long-term loyalty.
Achieving hyper-personalization
Hyper-personalization goes beyond standard personalization practices by analyzing the specific behaviors, preferences, and needs of each customer. This allows banks to tailor products, services, and communications on an individual level.
Latinia’s Next Best Actions engine enables banks to analyze real-time transactional data to anticipate customer needs and activate personalized communications at critical moments, delivering exactly what the customer needs, precisely when they need it.
This approach helps maintain a relevant and dynamic connection with users, strengthening banks’ competitive position against the most advanced tech players.
Connecting with customers outside banking platforms
Most financial decisions customers make occur outside digital banking platforms. Banks must adapt to this behavior by finding ways to deliver value at key moments in their customers’ lives, even when they’re not actively engaging with banking apps or websites.
By focusing on moments when customers aren’t actively using their apps, banks can provide a unique value proposition. If banks fail to leverage these touchpoints, they risk falling behind fintechs, which are already optimizing these interactions to capture customer attention and loyalty.
Creating an emotional connection with customers
In a competitive environment where differentiation is critical, emotional connection has become a key factor in building customer loyalty. While rational factors like fees and attractive products are important, emotions play a fundamental role in decision-making and long-term retention. Customers who develop an emotional bond with their bank are more likely to stay because they feel understood and believe the bank genuinely cares about their financial well-being.
For traditional banks, this is a crucial area to address to compete with models that already offer highly personalized and technology-driven services. To counter this advantage, banks need to prioritize creating emotional experiences that go beyond transactional interactions. This can be achieved through proactive service, personalized offerings, and quick responses during critical moments.
Leveraging advanced technologies, such as those provided by Latinia, allows banks to deliver personalized and relevant communication at key moments. This strengthens relationships and helps banks stand out in a market where loyalty is earned not just through pricing, but through memorable experiences that foster lasting emotional connections.
Conclusion: Opportunity or Threat?
The Banking as a Service (BaaS) model offers traditional banks a valuable opportunity to generate new revenue streams and expand their service offerings, enabling them to collaborate with external companies and reach a broader market. However, this opportunity comes with a critical challenge: the need to keep up with demands for innovation and technology.
Traditional banks must ensure they don’t fall behind in technological advancements, as fintechs and BaaS providers are rapidly transforming the customer experience with highly personalized and agile solutions. If banks fail to adopt innovative technologies such as hyper-personalization and real-time solutions, they risk losing their existing customers, who increasingly seek faster, more personalized, and tailored experiences.
In this way, BaaS represents both an opportunity and a threat: an opportunity to expand reach and revenue, but also a threat if banks cannot innovate and deliver customer-centric experiences.
Discover how Latinia can transform your bank’s customer interactions. Contact us today to learn more or request a demo of our powerful real-time messaging solutions.
Categories: Cloud & Tech