Back to basics is a blog series focused on defining and discussing some of the key terms used in modern-day banking.
Banking, which has traditionally been a closed off and exclusively vertical industry, is undergoing a massive transformation and part of that involves opening up and granting external parties access to data, functionality and customers. While this may seem like an uncompetitive move, many banks are moving to a more open way of working and it is these banks that embrace this change and partner with external providers that stand to capitalize most on new revenue streams and reach new customer bases.
What is Banking-as-a-Service (BaaS)?
Selon Medici, “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.”
BaaS involves banks providing third parties with access to core systems and functionality so that they can integrate digital banking and payment services into their own products. From a bank’s perspective, it involves embracing a more modular way of working and allowing an ecosystem of fintechs and software providers to connect to the bank through APIs.
These third-party providers can offer products and services that drastically improve a customer’s experience with the bank and the service provider. By partnering with service providers and fintechs, banks can help them to manoeuvre through the regulatory mind field that exists in the financial services industry. Banks can provide access to licensing, regulatory support and other functionality that would traditionally be difficult to get access to and would usually involve time-consuming processes.
BaaS Vs open banking
The term Banking-as-a-Services is often interchangeable with open banking as both involve sharing something that belongs to the bank with external parties; however, they are actually two distinct concepts. In the case of open banking, the bank provides access to third party providers to its existing customer data through open APIs. The bank is usually encouraged to do so by government mandates or initiatives for example Europe’s PSD2 legislation.
In the case of BaaS, the bank provides access to specific banking capabilities such as payments, onboarding, and lending, allowing non-bank companies to connect users outside of the bank’s customer base to access its banking services.
What are the benefits for banks of offering baaS?
De nouvelles sources de revenus
Les banques doivent s’adapter à des marchés plus concurrentiels et trouver des moyens de générer des bénéfices tout en maintenant de faibles coûts. Créer une plateforme BaaS et permettre à des fournisseurs tiers d’y accéder moyennant des frais peut injecter de nouveaux revenus dans la banque. Les modèles de revenus incluent des frais récurrents, des frais d'installation ou des accords de partage des revenus.
New customer bases
External providers may potentially have huge customer bases that are currently not bank customers. By providing BaaS to third parties, banks can reach new customer bases without a huge cost, which can lead to the beginning of a new, potentially profitable, relationship between the bank and the customer.
Improve customer experience
BaaS allows banks to integrate external parties’ products and services into their own offerings allowing them to provide their customers with an end-to-end customer experience without having to build new products.
What are the benefits for third-party providers of using BaaS?
Mise sur le marché plus rapide
En accédant aux fonctionnalités d'une banque, les fournisseurs tiers peuvent contourner certains obstacles majeurs en matière de développement et commercialiser leurs produits beaucoup plus rapidement que s'ils choisissaient de créer leurs propres fonctionnalités à partir de zéro.
Surmonter les complexités réglementaires
L'un des plus grands obstacles auxquels se heurtent les fournisseurs tiers souhaitant fournir des produits de services financiers est la complexité de la réglementation et de la conformité. En s'associant avec les banques, ils peuvent contourner ce problème en s'appuyant sur l'accord de licence des banques.
Traditional banking models are being challenged and modern banks will need to become modular and platform-based in order to effectively collaborate with players in the financial services ecosystem. BaaS has emerged as an innovative and revenue-driving business model that banks can adopt in order to reach new customers and improve the end-to-end customer journey. BaaS will play an important role in the future digital transformation of banks and stands to have a lasting impact on a banks’ future growth.
