What is the new wave of banking disruption the world is currently living?
And yet, the current disruption wave shows that separated solutions or partly developed financial technologies solve a very limited number of customer pains without healing the whole situation. Thus, all of those new and highly prospective technologies should come together to form a completely new type of a financial ecosystem.
What does it look like?
Part 3: Banking-as-a-Sevice
Banking has traditionally been a closed and highly vertical industry. Yet, banking is currently undergoing a massive transformation that involves opening up and providing external parties with access to data, functions and customers. While this may still seem like an uncompetitive move, many banks are moving towards a more open way of operating. Thus, they are embracing this change and partnering with external providers that can benefit the most from new revenue streams and attract new customers.
“Banking-as-a-service (BaaS) is an end-to-end process where third parties — FinTech, non-FinTech, developers, etc. — can access and execute financial services capabilities without having to develop them organically.”
The BaaS philosophy consists in banks providing third parties with access to core systems and functions so that they can integrate digital banking and payment services into their own products. From the bank's perspective, this involves a more modular way of working and allowing the ecosystem of fintech companies and software vendors to connect to the bank using dedicated APIs.
These third-party vendors may offer products and services that significantly improve customer's interactions with the bank and/or service provider. By partnering with service providers and fintech companies, banks can help them to overcome the regulatory landscape of the financial services industry. Banks can also provide access to licensing, regulatory support, and other features that would traditionally be difficult to access and that would typically require time costly processes.
The notion of “Banking-as-a-Service” is often understood as a synonym of “open banking” as both involve the sharing the bank facilities with external parties. Yet, those are actually two different concepts. While open banking, the bank provides third-party providers with access to existing data through its open APIs in accordance with government regulation or initiatives, Banking-as-a-service consists in banks opening access to its specific services such as payments, lendings or account opening to non-banking parties thus making them accessible to non-related audiences and fields.
The “Banking-as-a-Service” solution results in numerous benefits for both banks and third-party providers. Creating “Banking-as-a-Service” platform helps traditional banks to diversify their revenue streams at low costs by implementing revenue sharing agreements, setting setup and recurring fees. They also get access to “fresh” customer bases including unbanked layers and international clients. At the same time, their existing and those new customers can benefit from wider service range within one ecosystem/solution which increases customer loyalty.
One of the main benefits of third-party service providers including financial, payment and software startups is, of course, the faster market access in one of the most competitive fields in the world. Alongside with faster development and easier go-to-market process, those third-party projects overcome regulatory complexities, the stage where most of fintechs get stuck today.
Thus, while traditional banking models are suffering from multiple market challenges, their only reasonable solution seems to become modular and platform-based for effective and fast partnerships and, as a result, service range constant growth. Such a conceptual solution is the only one to help traditional banking institutions to keep their client base and continue world expansion even faster than ever before.
By offering Banking-as-a-Service, financial institutions can increase profit from their strong points and become partners with fintech projects (and especially unicorns among them) instead of competing with them. Most traditional banking models offer end-to-end banking solutions - from customer acquisition, connection, service, maintenance to increasing wallet share. With the BaaS concept, banks will have to recognize the efficiency of focusing on key competences in which they are strong and partner with specific service providers in those areas where their competence is lower.