Banking as a Service: How It Drives Better Business

Published on

Business owners are often warned not to overreach. “Stay in your lane,” says Marcus Lemonis, entrepreneur, investor, and star of the hit TV show, “The Profit.” Likewise, prevailing business wisdom encourages businesses not to stray too far from their core competencies. 

Given such sage advice, why then would Walmart, the world’s biggest omni-channel retailer, step into the world of banking-as-a-service (BaaS) by cashing payroll checks, transferring money, and offering bill payer software?

Well, the answer might surprise you. This article explains what BaaS isand what it’s notand why so many companies are venturing out of their lanes and offering digital banking services and embedded finance to their customers.

What Is Banking-as-a-Service (Baas)?

First of all, BaaS should not be confused with open banking or platform banking. All three are very different and serve different purposes. Here’s a brief explanation of each term.

Open Banking

Open banks offer customers' personal and financial data to third-party service providersfor example, tech startups or online financial service vendors. The data is accessed through third-party applications and application programming interfaces (APIs).

Companies who have access to the data use it for both honorable and nefarious means. According to Teradata, the risks of open banking include a "lack of process execution controls, fraudulent third-party access, lack of traceability of customer data use, and a lack of accountability by all parties."

Banking as a Platform (BaaP)

Banking-as-a-platform (BaaP) enables financial and non-financial companies to provide services to traditional banking institutions through their own platform. For example, an investment company like TD Ameritrade might "rent" its robo-advisor app to a competing traditional bank, such as Bank of America, so that customers can conduct investment business from the same account as their checking account. 

BaaP allows banks to focus on their core capabilities, which are its banking products, and to use a partner's expertise for things such as infrastructure or digital solutions. 

Banking as a Service (BaaS)

BaaS is different from open banking and BaaP. For BaaS, a solutions provider integrates an end-to-end, ready made platform that allows non-financial corporations (such as Walmart) to offer banking services directly to their customers. These platforms connect via APIs and work alongside their existing infrastructure. The Walmart Moneycard is an example of BaaS, as are the retailer's check cashing, prepaid debit cards, and financial services. In Walmart's case, this model is a way to win consumers using embedded finance tools on the platform. All of these banking services are embedded in one place to improve the customer experience. 

Walmart also offers complementary MoneyCenters in some brick-and-mortar locations to serve the customer through an additional channel. These services don't just provide additional customer servicesthey introduce a multitude of touchpoints between the retailer and the customer. Walmart and other BaaS users can monitor customer transaction patterns and tailor new products and services based on their likes and dislikes through these touchpoints.

How Does BaaS Work?

The BaaS business model integrates the digital core banking services of licensed banks and financial institutions into the products of other non-bank businesses. For example, Walmart partners with FDIC-insured Green Dot for its banking account services and offers a credit card backed by Capital One.

Green Dot’s banking system communicates with Walmart customers via APIs and webhooks so that the customer can conveniently access banking services directly through Walmart’s app or website.

What is Embedded Finance?

As the fintech movement continues to evolve, Embedded finance is the emerging trend that is empowering brands to shore up the customer relationship in even more creative ways. Where as BaaS allows big brands to offer existing banking services, embedded finance takes it to the next level by allowing big brands to offer more diverse and robust financial services – while removing the need to rely traditional banks at all. Embedded finance fits perfectly into the consumer-provider relationship because it gives brands more financial freedom, and allows them to meet their customers where they already are. 

When looking for an embedded finance partner, it's important to ask the right questions, especially as it relates to how they protect personal data and minimize fraud and money laundering. Luckily, top tier embedded finance providers have already done all the legwork when it comes to regulatory and compliance requirements. This means large corporations can quickly and easily adopt these financial services without adding new employees or taking on additional risks. 

How Can Companies Incorporate Embedded Finance Into Their Platforms?

Building your own financial services infrastructure can be complicated and costly to develop, but large companies look to leverage the ready-made platforms offered by innovative new businesses like Alviere

To incorporate embedded financial services into a platform, a company partners with a provider like Alviere, which offers ready-made, plug-and-play embedded financial servicesincluding banking services, payment services, branded cards, and global paymentswith minimal infrastructure investment or upfront costs.

How Does Embedded Finance Benefit Companies?

So, back to the original question: Why would Walmart, the world’s biggest omnichannel retailer, decide to offer financial services directly to their customers? First, embedded finance encourages customer loyalty by improving the user experience. Second, no matter how large or influential a company is, embedded finance provides the opportunity to reach an even broader market. Third, embedded finance allows companies to gather customer spending data critical to their business strategy. Lastly, by adopting an embedded finance platform, business can grow their revenue – and actually drive new revenue. Let’s take a closer look at these elements. 

Boosts Customer Loyalty

Banking as a service: Young woman banking with smartphone

According to a Harvard Business Review study, increasing customer retention by 5% can increase profits anywhere from 25-95%. While that's a big margin, the fact remains that a little increase in retention can have huge impact on overall profit. 

By adopting embedded finance, and offering their own banking services without needing to rely on a partner bank, customers are encouraged to stay within the company's ecosystem and enjoy the conveniences of their financial services.  

Captures a Younger Market

The embedded finance model allows companies to attract broader markets like millennials, Gen Z, teens, and the underbanked.

The millennial and Gen Z generations want both financial and non-financial services to be accessible in real-time via a mobile app, which embedded finance accommodates. For example, the teen market was the initial target of the tech company Current, which began by launching a teen debit card that parents controlled. Current managed to access a largely untapped market through its card.

Serves the Unbanked and the Underbanked

The unbanked are people who don't use traditional financial services such as credit cards and bank accounts. These consumers rely on alternative financial services from online providers rather than loans and credit from traditional banks. The unbanked and underbanked are big markets. According to the Federal Deposit Insurance Corporation (FDIC), 5% of U.S. households were unbanked in 2019, which translates to just over 7 million households.

Younger generations and low-income earners can fall into this category. Often, they do not have a credit history (or high credit score) and cannot obtain financing through traditional means.

Provides Insight Into Customer Spending Patterns for Future Strategy

Offering banking and financial services strengthens a company's relationship with its customers and increases interactions exponentially. Companies can gain valuable insights into customer spending trends to improve their services, and provide more of what customers want. 

When it comes to spending trends and data, finding the right partner is important. With most embedded finance platforms, the data is owned by the 3rd party provider, and not easily shared. With an embedded partner like Alviere, large enterprise companies own all the consumer spending data, and can easily incorporate it into their larger sales and marketing strategies. 

Enhances Fraud Protection

There are multiple benefits of working with a ready-made embedded finance platform like Alviere, especially when it comes to compliance, fraud and security.

Because Alviere provides one holistic platform, companies don't have to worry about different API's talking and working with one another. Everything is under one roof, so whether it's Soc 1 and Soc 2 compliance, Anti-Money Laundering (AML) or PCI compliance, your company and customer data is protected on multiple levels.

At Alviere, we go above and beyond with our proprietary ledger, which acts like internal blockchain infrastructure. This ledger provides a record anytime money is moved. Not only does this protect against fraudulent or illegal activity, it adds another layer of protection and transparency. Not every embedded finance platform offers their own proprietary ledger, so make sure to do your research. You want to make sure the company you're working with isn't outsourcing that to a 3rd party, because it can open the door for more nefarious acts.

Banking as a Service and Embedded Finance: An Investment in Your Customer Relationships 

Why should a company incorporate embedded finance into its infrastructure and product offerings? The simple answer is to strengthen your customer loyalty and drive more revenue. But there are other reasons to incorporate embedded finance that have more long-term opportunities.

Embedded finance technology provides knowledge that businesses can harness to develop tailored products in the future. This knowledge will shape business strategy to provide a more customized customer experience. As technology continues to evolve, companies must adapt and accelerate rather than get stuck in their lane and fall behind.

Whether it's branded debit, gift, and prepaid cards or processing global payments, embedded finance can deepen your customer relationship and take you to the next level of fintech. Contact Alviere and find out how financial services through a platform provider can add value to your business.