Tech, ExplainedFintech
Concept

Banking as a service

A bank account from a non-bank.

HOW IT WORKSThe customer opens anaccount in a non-bankcompany's appThe app checks KYCunder the partnerbank's rulesThe partner bankopens the accountin its own systemMoney paid in iscredited at thepartner bankThe app shows thebalance and sendspayments through thebank's APIsA company without a banking licence can offer accounts, while a licensed bank keeps the money andfollows the RBI's rules.HOW IT WORKSThe customeropens anaccount in anon-bankcompany's appThe appchecks KYCunder thepartnerbank's rulesThe partnerbank opensthe accountin itsown systemMoney paid inis creditedat thepartner bankThe app showsthe balanceand sendspaymentsthrough thebank's APIsA company without a banking licence can offer accounts, while a licensed bank keeps the money andfollows the RBI's rules.HOW IT WORKSThe customer opens an account in anon-bank company's app↓The app checks KYC under the partnerbank's rules↓The partner bank opens the account in itsown system↓Money paid in is creditedat the partner bank↓The app shows the balance and sendspayments through the bank's APIsA company without a banking licence can offer accounts,while a licensed bank keeps the money and follows theRBI's rules.
A company's app opens the customer's account at its partner bank, which holds the licence and the money, while the app checks KYC, shows the balance and sends payments.
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Banking as a service, or BaaS, means that a company that is not a bank offers bank accounts, cards or loans to its customers through a partner bank. The partner bank holds the banking licence, keeps the money and follows the RBI's rules. The company builds the app that the customer sees and uses.

Here is how it works. The customer downloads the company's app and opens an account. The app shows the company's own name and colours. But the account is actually opened at the partner bank. The app checks the customer's identity, which is called KYC, under the bank's rules. Money paid into the account, such as a salary, is credited at the partner bank. The app shows the balance and sends payments. If the company shuts down, the money is still in the customer's account at the bank.

How do the two companies' systems connect? The bank's own systems keep the accounts and record every deposit and withdrawal. The bank offers banking APIs, which let the company's software ask the bank's software to open an account, issue a card or send a payment, without anyone at the bank doing it by hand. Some banks launch these cards on a card issuing platform that runs beside their old core banking system.

Take, for example, a neobank in India. It is usually a BaaS app, because it has no banking licence of its own.

Consider a small company that opens a business current account in an app. The account is often held at a partner bank, which lends the app its licence.

Say a travel app wants to give its users a prepaid card for trips abroad. A partner bank issues the card, and the app designs it and shows each user's spending.

How is BaaS different from embedded finance? The two are closely related. Embedded finance is what the customer sees: a loan or a payment offered inside a shopping app or a business tool. BaaS is the arrangement underneath: a licensed bank lets other companies use its licence and its systems, for a fee. The lender behind an embedded loan may be a bank or an NBFC, and the page on NBFC vs bank explains the difference between those two licences.

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