My last blog explored Banking as a Platform (BaaP) to assess its market drivers and potential benefits. Today’s blog considers Banking as a Service (BaaS), a business model which is sometimes described as the inverse of BaaP. Are these two bookends really complements or substitutes?
BaaS offers a new route to market for banks. It empowers them to attract new customers that might otherwise be unprofitable or simply out of reach. In practice, BaaS harnesses the flexible power of cloud and digital technology to reconfigure the banking value chain and allow non-financial companies to market financial products precisely where and when they are needed. Practical examples include point-of-sale (POS) loans and the provision of basic banking services – such as deposit and withdrawals – at convenience stores. Being cloud-based, BaaS allows pay-as-you-go pricing so new propositions can be created quickly with minimal investment.
Partnership at work
Like BaaP, BaaS draws on partnership to deliver a customer proposition that is far greater than the sum of its parts. Although BaaS is not strictly an open banking initiative, it does embrace open technologies such as application program interfaces (APIs) and the collaborative spirit of open banking. With the right approach, BaaS can offer benefits to all parties, but the biggest winner is the customer who benefits from a better, integrated experience.
While much of the attention around BaaS has focused on the provision of financial services by non-financial companies, a bank may also use BaaS to incorporate the services of another bank (or banks) into its own service portfolio. In theory, every element of the banking value chain can be disaggregated and exposed through APIs to other members of the financial ecosystem. This shows the disruptive potential of BaaS; banks may be rivals in the provision of certain services while being partners for providing others.
Every bank must look inward and outward to consider its market strengths and weaknesses to understand the true potential of BaaS. At a fundamental level, the goal must be to attract and retain customers in ways that are not currently possible, so the decision to participate is significant and strategic. With the right approach, BaaS can also help a legacy bank to modernize, fend off digital competitors and win new business.
Too good to be true?
There are potential drawbacks with BaaS and banks must consider their options carefully. BaaS leverages a bank’s expertise and regulated financial infrastructure to create new – often specialist – value propositions and deliver them in context. An important consideration is whether potential customers would not otherwise be reachable. It’s also important to remember that customers of BaaS will be “owned” by the partner or third party, so partner choice is critical. And, to further add to the complexity, there are several versions of BaaS available in the market.
Flavors of BaaS
Banking as a Service can be offered in various ways. For example:
Out of the box. This is where a third party embeds end-to-end banking services into its own proposition as part of an integrated service. As the simplest version of BaaS, it is best suited to smaller businesses wanting to include “vanilla” financial services – payments, for example. Most of these solutions adopt a variable revenue-sharing model.
Customizable. This is more complex and requires a deeper level of partnership and typically more than one service provider. Under this model, there are often shared responsibilities with each partner providing service elements. Typically, the service provider configures the service while a bank provides regulated components such as regulatory compliance or market settlement. This type of BaaS partnership is potentially lucrative but requires careful consideration and commitment from all parties.
Aggregated. As the BaaS model matures further, it will inevitably become more dynamic and flexible. It seems likely that BaaS providers will provide a gateway between the suppliers (banks) and customer-facing brands. With the right API strategy, a bank can offer service components where and when they are needed. With the addition of new technologies – such as artificial intelligence – there are unlimited ways to create value while ensuring that all parties operate in harmony.
A moveable feast
The above list of configurations is not exhaustive, but it illustrates how the banking value chain can be disaggregated with banks acting as providers, distributors or both. As open banking gains momentum and morphs into open finance, it seems inevitable that other players will enter the ecosystem. Like most areas of finance, data will play a pivotal role, enabling service to be combined and customized to exact customer needs. For example, customer data can be used to offer frictionless switching and renewal services, or wealth advice, based on an individual’s aggregate financial position. While these extend beyond the initial scope of BaaS, they do show the likely direction of travel.
As banks become more open and connected, it seems likely that BaaS and BaaP will continue to converge and complement each other in a collaborative real-time ecosystem. The age of increased competition is also one of collaboration.