Banking-as-a-Service (BaaS)

Banking-as-a-Service (BaaS) represents a fundamental shift in the delivery of financial products, moving away from the traditional, monolithic banking model to a modular, API-driven structure. In traditional banking, a customer interacts directly with a single financial institution for all services, from checking accounts to loans. The bank owns the entire customer relationship, the technology stack, and the regulatory compliance burden. BaaS, conversely, unbundles these components. A licensed bank, often referred to as a Sponsor Bank, handles the heavy lifting of regulation, compliance, and core ledger management, while exposing specific functionalities through APIs. This allows a third-party distributor, such as a fintech startup or a major retailer, to build a custom user interface and customer experience on top of the bank's infrastructure. The key difference lies in the distribution channel and the ownership of the customer interface. Traditional banks are vertically integrated; BaaS creates a horizontal separation, where the bank is the manufacturer and the third-party is the distributor.