To keep up with innovation and changing regulations, different approaches are emerging to support the development of fintechs. Business models such as banking as a service and software as a service are being considered. This article looks at how they work and puts their different characteristics into perspective to help fintechs make the best decisions.

BaaS and SaaS: what are they?

BaaS - Banking as a Service

Building on the foundations laid by Open Banking, Banking as a Service (BaaS) is a major innovation that has revolutionized the banking industry. BaaS is an approach that enables all businesses to offer a range of banking services as part of their offering. To do this, they need to partner with banks or regulated financial institutions that are licensed as credit, e-money, or payment institutions. This way, the non-bank company can access its partner's banking infrastructure and functionalities. It can then offer services related to payments, credit and debit cards, compliance measures (KYC identity checks), etc.

Today, different BaaS models coexist. Depending on their typology, the specific segments they address, and their products, fintechs can rely on players such as traditional banks, challenger banks, or more technology-oriented models (middleware or embedded financial platforms).

SaaS Core Banking

SaaS (Software as a Service) is a business model that allows you to rely on a service provider to access services rather than install and maintain your solutions in-house.

On the other hand, Core Banking Platforms are the IT architectures responsible for managing the operations of a financial institution. Core Banking Platforms bring together different modules to handle a wide range of operations such as account management, transactions, identity checks (KYC/KYB), and so on.

Delivered in SaaS mode, the new generation of core banking platforms are designed to improve the agility and performance of organizations. They enable them to outsource non-value-added tasks and connect with a broad ecosystem of partners to offer a wide range of innovative, customizable products and services to best meet customer needs and differentiate themselves in an increasingly competitive market.

Read also - Universal banks: is SaaS compatible with your IT architecture?

BaaS vs. SaaS: how to make the right choice?

Depending on their degree of maturity, the BaaS and SaaS models represent two approaches that can be highly relevant to financial institutions. However, each has its own characteristics that influence organizations' strategic choices. To help you make sense of the situation, here's an overview of the two models.

BaaS: a turnkey model for getting started?

The benefits:

• Simplicity: For a fintech that is just starting out and may not be very mature from a technological and regulatory perspective, BaaS removes the barriers to entry with a turnkey approach. Registering as a BaaS agent takes just a few weeks, whereas obtaining a license would be much more arduous.
• Reduced time-to-market: This model also guarantees an accelerated time-to-market based on standardized, ready-to-use modules.
• Lower initial costs: using a BaaS provides an attractive cost structure from the outset, as it is much lower and more suitable for launch and testing.
• Regulatory Management: Demonstrating compliance with regulators is often lengthy, cumbersome, and costly. This responsibility is taken over by the BaaS, allowing the fintech to offload it.

Disadvantages

• Lack of autonomy and flexibility: BaaS agents must follow the rules of their provider. This dependency can lead to a lack of flexibility that affects the associated customer experience, as it may not be possible to customize offerings as much as desired. For example, the strict KYC procedures imposed by BaaS can affect their ability to manage this step effectively.
• Regulatory issues: as of 2023, regulators have increased compliance requirements for BaaS players, which may be challenging.
• Profitability after a certain growth threshold: initially highly efficient, the profitability of the model diminishes after a certain level of maturity due to an economic approach based on high variable costs: transaction volume number of customers.
• Limited resources to build a differentiated offering: for example, the BaaS model imposes its ecosystem and, therefore, doesn't allow you to connect with selected partners to meet specific needs, create a truly differentiated offering, and launch new products and services.

BaaS providers offer many advantages for quickly launching a business and testing a business model. However, these initial advantages are less relevant for fintechs later.            

As the financial landscape evolves, so do consumer expectations: seamless pathways, one-click payments, personalized recommendations... BaaS models, due to their lack of flexibility and limited autonomy, can only offer a limited experience to meet these new challenges. Once they have reached a certain level of growth, fintechs may find themselves questioning aspects such as compliance, products to be managed in-house, or the launch of new products, and they may consider moving to new solutions.

The SaaS Core Banking Platform: the solution for the future?

The SaaS Core Banking Platform is a strategic move for fintechs that have reached a certain level of maturity and are seeing their customer base grow. Moving to this type of solution allows them to:

Create their own ecosystem. 

While BaaS solutions are standardized, the SaaS model allows companies to build their own environment by choosing the partners that best suit their needs. The far greater scope for customization offered by SaaS core banking platforms gives you access to a catalog of products and services at your fingertips in less time to better seize market opportunities and meet the precise needs of your customers: configurable KYC processes, card issuer customization, tailored loyalty programs, etc.

Have greater flexibility and autonomy

In some cases, fintechs have been able to develop their own functionality to compensate for the lack of customization offered by their BaaS provider.

The SaaS platform offers a flexible architecture that allows them to retain and capitalize on these assets. Similarly, this model allows fintechs to retain control of their key processes, enabling them to launch new products with 100% autonomy.

Focus on the essentials

The autonomy the SaaS model provides allows companies to focus on creating value-added products for their customers. At the same time, the complex technological aspects are managed transparently and securely by the service provider.

From a certain point of maturity, moving to a SaaS model allows you to gain independence, develop new products more easily, and manage costs better, but also focus on your growth ambitions by fostering innovation and personalized customer experiences.

Skaleet: Your Next Generation SaaS Core Banking Partner

Skaleet offers next-generation, API-first SaaS Core Banking for continuous evolution. Our platform architecture gives you the flexibility, configurability, scalability, and agility to seize market opportunities and launch innovative financial services while integrating the highest security standards.    

Are you planning a strategic move to SaaS? Our approach enables rapid deployment in an average of 4 months for optimized time-to-market and seamless transition.

Want to find out more? Contact our team.