Banking as a Service; A short explainer

There has been a lot of talk about financial services and fintech growth on the continent and new models of doing or offering financial services on the continent keep growing every day. One of the recent modes of offering financial services using Fintech on the Continent is called, Banking as a Service (BaaS).

So, what does Banking as a Service mean? To explain what it means, I am going to share a little story to illustrate this.

Once upon a time, there was a small village that was full of traders. The little trading town had a vibrant local economy, and it was common for people to come from foreign lands to buy in the town. Traders enjoyed massive success and things were going well for its inhabitants.

As time went on, A man went to the traders and convinced them to allow him to help them keep their money. It was safer for them, and they could always come back to get it whenever they needed the money. The traders loved the idea because it meant they didn't have to be responsible for their money, the traders agreed to let him do this for them. Since he would be keeping people's money and needed security guarantees, he approached the King for a special squad of guards to protect him. The king gave him an edict with strong guidelines, many of his chiefs were traders and wanted to make sure their money was secure.

Pretty soon, the requirements became a lot, and the system became so complex that not a lot of people could compete with the man. His services to the traders also increased from just helping them keep their money safe to loaning them emergency cash with guarantees to pay back with interest. Business boomed, and the man's influence and importance grew too. Since the King could easily track taxes through what he kept, the requirements to starting the same business as the bank grew. Several other people started the same business with the man in other towns and villages with varying success. Over time, several of the traders had grown large themselves and some of their customers would require them to loan them money upfront and keep money with them. They would answer that they had no capacity for that as the requirements would put a strain on their business.

A young man who had grown under the tutelage of the man wanted to go on his own and was looking for a way to also attract the traders to his side. After thinking for a while, he realized that aside from giving money and loaning them, what if he could give the ability to loan and save to the traders.

He was excited. He spoke to a couple of his friends and told them of his idea, some laughed it off while others encouraged him. He approached the King that he was ready to meet the requirements for starting his own Keeping money for traders’ business, he had managed to raise some cash from his father-in-law. He proceeded to set up a small location and went to work. He would go to the traders and convince them that he would allow them to be able to do some things the man did without having to approach the king, they would then ask him how. He would explain how he would use his reputation to back the while they would offer it to their customers.

To mark their agreement, he would give them a plaque to hang at their location, whenever the tax collectors asked why they were loaning money to people, they would show them the plaque that they should approach the young man. The collectors would visit the young man and he would guarantee them that it was his doing.

In no time, several of the traders would offer loans themselves to their customers, some would keep the money for them, some even issued notes to their customers which allowed them to buy at a cheaper price from certain merchants. A lot of people started coming out with different trading ideas and he would back them with the permission he got from the King.

His fame spread abroad, and many came to learn of his ways. He and his family lived happily ever after Now, the above story has some obvious clues, the man's business was a bank and the twist the young man added to it is called Banking as a Service.

In a simple sense, Banking as a Service is when Fintech allows Businesses to offer Banking services to their customers. So a restaurant chain like the Chicken Republic may offer wallets and BNPL services to their customers without having a Banking license, they have a partner that has the license and handles all the regulatory requirements for them.

So, BaaS start-up allows organizations to offer Banking services on their platform using APIs, this allows essentially every company to be a Fintech company. Some also refer to this as embedded finance, there have been some notable examples over the past few years. For example, Starbucks wallets allow customers to keep a special wallet with the company, they can use this to buy coffee and the like. They also get to use the data to offer coupons and cashback since they now know how much a customer spends with them. Shopify offers loans to merchants on their platform which allows them to scale their business, this and many more examples have been popping up over the last few years.

Banking as a Service(BaaS) is still new on the continent and has the potential to revolutionize how we interact with financial products in interesting ways. At Anchor, we are at the forefront of this change. We will be releasing more resources on this in the coming weeks and months and how our APIs can help you offer Banking services to your customers.