Many of us are now familiar with the concept of software as a service (SaaS)—that is, the licensing and delivery model that enables users to subscribe to use-specific programmes and applications over the internet rather than having to buy them outright and install them on their computers. In the same way that this plug-and-play-type model has proven successful for software providers, so, too, is the plug-and-play banking equivalent—banking as a service (BaaS)—now doing so for financial services.
A trend that has rapidly gathered pace over the last 18 months or so, BaaS, at its core, is an on-demand service that enables users to access financial services over the internet. It typically does this through banks’ offering up their systems to third-party service providers. such as fintechs (financial-technology firms), that are looking to provide retail-banking offerings, typically through the use of application programming interfaces (APIs). Indeed, some label it as the “APIficiation” of banking.
As renowned fintech commentator Chris Skinner explained, “SaaS is basically paying for applications as you use them, rather than buying them. These services used to cost you a fortune but are now free or near enough. That’s where banking is going.” And it seems to be going there fast. Today, a multitude of service providers are now attempting to embed financial services into their offerings to enhance the end-to-end journey for their customers. And thanks to BaaS platforms, this process is fast becoming commonplace.
Third parties can provide various banking offerings to their customers by positioning themselves on top of the existing regulated infrastructure of licensed banks. This enables service providers from virtually any sector to embed a wide range of financial services into their suite of offerings for their customers and for the customers themselves to conveniently access those financial services despite not necessarily being customers of the underlying bank. It is this flexible plug-and-play approach to banking that is perhaps the most absorbing aspect of BaaS. Service providers can simply pick and mix from a range of financial products and then tailor them to the needs of their customers; in doing so, they can create new financial platforms of their own.
This may sound all too familiar, especially since the advent of Open Banking. Indeed, given their similarities, BaaS should not be an entirely alien concept. That said, there are distinct differences between the two. BaaS is classed as a platform that exists under the umbrella framework of Open Banking. It requires collaboration among a handful of stakeholders, but, ultimately, its aim is to deliver the best combination of features of those stakeholders to the customer in a quick, efficient manner. Open Banking, however, is not as granular—instead, it is focused on offering transparency to customers by providing them with information on the various features of different bank accounts. And while Open Banking customers are transacting directly with their chosen banks, it is the service provider or the brand entity with which customers interact on BaaS platforms.
Typically, BaaS might involve a third-party provider paying a bank to gain access to its systems, which triggers the bank to allow the third-party provider to hook in using its APIs. Once the third party gains access, it should be able to create and offer banking products and services using the platform’s systems. Some of the most important banking functionalities that can be made available to service providers include payments, back-office operations, risk management, compliance and customer service.
And sometimes, the service provider that offers the core banking capabilities and the brand that faces the consumer are different entities. Singapore’s Grab, which began as a ride-hailing service similar to Uber, for instance, has embedded payment services and its own wallet into its app. But behind Grab sits, among other service providers, the Dutch payment company Adyen, which provides e-commerce, mobile and point-of-sale payments through an API-driven platform. The service provider may have a banking license itself, as is the case with Adyen, or else it will form a partnership with a separate regulated, licensed banking entity to gain access to the underlying financial products and services.
Digital financial-services company 11:FS identifies three key layers that constitute the BaaS stack:
- Brand: The company that is aiming to embed financial services into its customer offering;
- Service provider: The company supplying modular financial services to brands as a service;
- License holder: Typically, a licensed bank that partners with providers and rents out its license as a service. This enables partner brands to provide compliant financial services.
For example, the Asia-focused UK bank Standard Chartered launched nexus, its new banking-as-a-service solution in March. “Through nexus, digital platforms and ecosystems like e-commerce, social media or ride-hailing companies will be able to offer loans, credit cards and savings accounts co-created with the bank to their customers under their own brand name,” the bank stated upon its launch. “The USD29 trillion e-commerce market and the fast-growing platform businesses space are constantly looking for innovative solutions that offer customers more choice and greater convenience. nexus will help these businesses benefit from Standard Chartered’s strong balance sheet and world-class banking technology to deepen customer loyalty and grow revenues.”
This structure can prove incredibly useful for service providers. For instance, a provider of international payments will want to market itself as being as similar as possible to a licensed bank, with comparable capabilities. Indeed, some payments companies even offer typical banking services such as current accounts, savings facilities, and debit and credit cards. By utilising BaaS, the payments company can optimise this strategy without actually having to hold a banking license itself. And by engaging with a bank via the BaaS platform, the payments company has the advantage of offering banking products to the public whilst being backed by a licensed, regulated banking entity.
It also means that the payments company can save time and money by not having to obtain the necessary regulatory licenses required to offer certain banking products and services—and also by relying on the sophisticated technology infrastructure of the bank. In turn, this frees up time and cost for the payments company to focus on its business strategy.
The main benefit for the bank within the BaaS ecosystem, meanwhile, is that it can establish solid relationships with fintech companies, allowing for collaboration opportunities between the banking and fintech sectors rather than having to compete with each other. And by monetising the BaaS facility, it also means that the fintech becomes a customer for the bank. Fintechs also have the flexibility to serve almost any financial need for potential customers, and, as such, collaboration with them allows banks to continue benefiting from the often powerful value chains that are embedded in the platform.
“Historically, banks would manufacture and distribute financial products. Banks would work with a series of providers in a tightly coupled technical, business and operating model,” noted 11:FS in its recent report “Banking as a Service: Reimagining Financial Services With Modular Banking”. “The banks have a high cost of maintaining pace with regulation and despite spending billions, often do not build developer and brand-friendly APIs. It is this gap that the Banking as a Service providers fill.” That said, those banks that have already warmed to the digitalisation trends that have swept across the industry in recent years will clearly be better positioned to support third parties than those that have stuck with more traditional systems and infrastructure. These digitally minded banks should be able to move into the BaaS arena more seamlessly.
And the benefit for end-customers is that they receive the best of both worlds: the convenience of financial services through an on-demand digital platform and the depth and robustness that come from a licensed, regulated banking institution. But ultimately, it may be the concept of the platform that ends up as the real winner. Already, we see this concept firmly embedded in various other aspects of our lives. Whether it’s looking for accommodation for our travels, ordering food online or hailing a ride downtown, we are increasingly relying on platform companies to make these everyday tasks happen. And increasingly, people are wondering why sorting out our financial affairs can’t be done in the same manner.
As the age of fintech continues to promote the democratisation of finance, BaaS would certainly seem to help in that process. It offers a radically different approach to financial services—one that deconstructs the old, traditional model and places its building blocks in the hands of a wider range of stakeholders. By doing so, banking is now set to become just one more activity that will be handed over to the platform economy.
Excellent Article !