Digital Business Services

Banking-as-a-Service is digitally transforming financial institutions

Massive amounts of data, evolving technologies, a surge in fintech startups competing with legacy banks, rising costs, and the constant threat of customer attrition has put banking services under immense pressure to evolve with new and differentiating services. No wonder that banks, as well as non-banks, are investing heavily in devising alternate ways of serving their customers.

With the number of banking and fintech models multiplying, it is becoming increasingly important to differentiate between them. Let’s look at two such models:

Banking-as-a-Service (also called BaaS)

Open Banking

What is Banking-as-a-Service (BaaS)?

First, let’s get the facts right on our existing banking regulations –

• Any entity wanting to offer banking services, must acquire a banking license
• Banking regulations are strict on money laundering and other compliances, which essentially are not core competencies of non-banks

Such regulations, in the past, hindered innovation in the way the customers were served. This is where Banking-as-a-Service comes in.

BaaS is a model where licensed banks integrate their digital services directly into the products of non-banking businesses. The best way to explain this further would be by an example – take, for instance, an online electronic store, which is facing sharp competition from its peers. In order to improve customer loyalty, the store plans to launch a debit card that would award the customer loyalty points every time they make a purchase. It can also bundle up an offer for the customer to opt for a loan. This allows the store to retain satisfied customers, while banks can leverage the subsequent purchase pattern of the users to offer them customized services.This way, a non-banking entity can offer its customers digital banking services, such as mobile banking accounts, debit cards, loans, and payment services, without needing to acquire a banking license of their own. In turn, the bank’s server communicates with APIs of the online store to enable services directly through the store’s website or mobile application.

Open banking vs. BaaS: How is Banking-as-a-Service different from open banking?

Open Banking also involves connecting to non-banks via API, similar to BaaS. These two models are, therefore, often confused with each other. Technically though, Open Banking provides read-only data, while BaaS offers the ability to read and edit the given data. In simpler words, Open Banking will allow companies to access and pull the bank account data through APIs, and non-banking businesses will merely use the data for their products.

On the other hand, BaaS, along with providing access to data, will also let the non-banking business to open an account and provide its products and services to the customer.

Take, for example, a financial management app, that provides insights on consumer spends against their savings by accessing the user’s bank account. Such a platform is just an aggregator of information, enabled by a bank’s API, which is integrated into the platform’s application.

Who are BaaS providers?

There are plenty of pure BaaS (solely BaaS) and non-pure BaaS providers.

London-based Bankable, for instance, is a pure-bred BaaS player. It allows fintech companies and other financial institutions to create payment solutions on its platform. Each company using its BaaS platform is given access to resources such as virtual ledger manager, digital banking services, e-wallets, and payment card programs.

On the other hand, a non-pure BaaS provider offers retail banking services.

Fintech companies, retailers, and brands, for example, use Starling Bank’s BaaS platform to create financial solutions that suit their company’s specific needs.

Beyond these providers, there are tech companies that assist new startups in integrating with BaaS providers and other APIs from around the globe.

Banking-as-a-service

To start, countries will have to open up and ease their regulations for financial institutions to venture into new revenue streams. For Banks, on the other hand, there are a few tenets that would be critical for their BaaS journey:

1. Defining the objective:

   A bank’s BaaS strategy will depend on its objectives – whether it is to improve customer service or revenue growth or gain competitive advantage. If the objective is competitive advantage, then it would be worthwhile to partner with a platform that will allow them to offer services to the masses.

2. Organization-wide buy-in:

   It is important for business heads to explore BaaS and educate the organization about its benefits, even though it entails cross-sharing of customers. It is key to maintain a constant line of communication between corporate and business heads to participate in this growth.

3. Technology strategy:

   Having an API platform is just one part of becoming a BaaS provider. It will be more about having a roadmap that supports innovation across the ecosystem – like having an API development lifecycle or API Integration.

4. Operating model:

   Banks will require a dedicated team or a COE with strong governance parameters between IT, business, and COE. The COE can be aligned with IT and focus on architecture, as well as security management.

   Whether the banks like it or not, they will have to open up their data and infrastructure to fintech companies and non-banking entities, if they want to survive in the long run.

   We hope to have brought clarity on these overlapping business models, which continue to evolve. In the end, the ball is in the court of the banking institutions and the progress hereafter will depend on how they want to play with it.