Business Consulting

Understanding Banking as a Service

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It is no secret that technology is significantly changing the banking landscape. In addition to the challenge of low interest rates squeezing the bottom line of Banks, competition within the market is further driven by new entrants who are well placed to offer the agile, quicker and more accessible services which customers are demanding.

Banking as a Services (BaaS) offers the opportunity for large incumbent banks to leverage their regulated infrastructure and get their products to market via third parties. Ultimately BaaS can enable a platform for non-bank organisations to access a Bank’s systems and provide Banking products to their customers. An example may be a supermarket which is able to offer typical banking products such as loans and current accounts as part of a combined customer journey, without needing to acquire a banking license of their own.

In this case the non-bank business will be able to offer their customers financial products by acting as an intermediary for a Bank.  This is enabled by the Bank opening Application Programming Interfaces (APIs) which, in non-technical terms, provides a communication channel. In the case of the example mentioned, the end customer will be able to use the supermarket’s digital channels to access the financial services of the partnering Bank via the open APIs. The key benefit for the Bank is being able to offer their products (perhaps white labelled) to a new customer base via a route to market which leverages the front end technology of their non-bank partner.

In some cases, BaaS can be confused with Open Banking due to both initiatives utilising open APIs to enable Banks to engage with third parties. The key difference is BaaS enables the third party/non-bank to offer banking services whereas Open Banking is when a third party/another Bank uses the data for its own products or operations. Examples of where Open Banking is leveraged include when a customer opens a new bank account. Open APIs enable lenders to access an overview of the customer’s credit history and in some cases Know Your Customer (KYC) information more seamlessly. This facilitates quicker compliance checks and decision making. It also serves the ever evolving expectations for quick and smoother customer experiences.

While Banks continue to face challenging market conditions and competition, technology does offer opportunities for them to extend their customer base, form mutually beneficial partnerships and ultimately grow their revenue. As with any organisation, Banks need to keep up with innovation and embrace change in order to remain relevant. Customer loyalty is certainly harder to come by than it used to be.