# Insights

Jan 22, 2020

The rise of banking as a service

Reading time: Eight minutes

Banks need comprehensive digital transformations to thrive. Banks that fail to embrace change run the risk of losing customer relationships, and with them, a core segment of their business.

Banking as a service

In 2018, Starling Bank CEO Anne Boden declared transaction banking dead. She went on to conclude that “it’s a time to celebrate a new age of banking — the age of the API — the age of Banking-as-a-Service.” Retail banking may not be dead, but it’s also undergoing significant upheaval as well.  

Branch closures have accelerated in recent years. A recent study found that a bank’s physical location is far less important than it was a decade ago, with only 10 percent of today’s customers citing it among their top criteria for choosing a bank. 

Branches, and the face-to-face interactions they offer, aren’t going anywhere, but the future is clearly digital. Many retail banks are leaking customers to fintechs and single-line specialist companies, according to a recent Bain & Company study. “75% of consumers between 18 and 24 would use a financial product offered by an established tech company,” the study says. Furthermore, 46 percent of US consumers indicate they already use financial services offered by a fintech company. 

Although it’s become a meme in the last few years, the fact remains that many banks need comprehensive digital transformations if they want to stem this tide. Banks that fail to embrace change run the risk of losing customer relationships, and with them, a core segment of their business. 

New solutions

Banking as a service (BaaS) is a solution for banks that need to modernize. It provides third parties access to bank functionality via APIs so that non-bank companies can connect users outside of the bank’s existing footprint to financial services. Many legacy financial institutions have recognized that collaborating with fintechs is a quick way to bring innovative tech in-house and bolster their BaaS offerings.

Today, BaaS has become a widely accepted revenue model for forward-thinking banks and independent technology platforms. What began as an ungoverned and insecure way of uncovering functionality has evolved to become a process-driven and governed mode of opening up an array of APIs per industry security standards.  

Riding the BaaS wave

Some look at the open banking developments of the last few years and see an existential threat. But tech-savvy legacy banks are treating this as an opportunity by moving proactively into the BaaS space — taking a traditional paradigm and recasting it to reflect advances in technology, culture, demand and practice. In this sense, BBVA is one of the first movers. In 2018 they launched the Open platform, which enables third parties to easily integrate payments and complementary banking services into their own business models. 

This is not only a way for banks to extend their digital offerings, but to prepare for a future where users may never visit a branch or even open a banking app. Only about 25 percent of account holders visited a branch in 2018 to open a new deposit account, according to Market Force.  

In the future, consumers will likely use Facebook, Apple, Google or another application with native financial services embedded neatly alongside. Google recently confirmed that it will begin offering checking accounts next year. Apple has an indestructible credit slab. And Facebook just announced Facebook Pay — Venmo with more rigorous data collection.  

The fintech-bank collaboration can be a shortcut to prepare for this future, and it makes sense from both sides of the aisle.  

Fintechs offer an innovation mindset, agility, consumer-centric perspective and an infrastructure built for digital. Conversely, most banking institutions have scale, stronger brand recognition and established trust with many prime and super-prime consumers. They also have proper licensure, adequate capital, knowledge of regulations and an established distribution network.  

Although fintech-bank partnerships are not without their challenges, they’re a linchpin for riding the wave of change successfully. This is true whether you’re a multibillion-dollar traditional bank or a startup looking to bring cutting-edge technology to market.  

BaaS in action

BaaS allows financial institutions to reinvent themselves as assemblers of financial management solutions, tailored to meet specific customer needs. Whether a bank builds its own platform or works with a partner, BaaS can offer significant strategic value in areas such as:  

  • Growth in a customer base via partnerships 
  • Agile entry into new business verticals 
  • Reduced cost of operations and distribution 

These benefits have long been recognized, and many see BaaS as a necessary way to not only plug any gaps in their offerings but drive sustainable growth. Examples include:  

  • Radius Bank – garnered a reputation in the US for partnering with FinTech companies and servicing a variety of non-bank clients. 
  • Solaris Bank – built a BaaS platform that powers Alipay, the world’s largest payment and lifestyle platform. 
  • Yes Bank – provides APIs that are enabling e-commerce platforms to initiate near real-time refund of money into customers’ bank accounts. 

While APIs have been around for a long time, the ability to commercialize them at scale is more recent. The banks mentioned above are some of the leaders in creating all-digital, mobile-first and integrated customer experiences.  

Looking forward

Banking has come late to the unbundling revolution, but it’s long overdue for its own software-as-a-service transformation. Accelerating technological advancements, new legislation and increasingly high consumer expectations are forcing change.  

To keep pace, banks must embrace a service-oriented and componentized architectural approach. They must adopt open APIs, innovate on business models and fortify their value propositions.  

To this end, BaaS is a crucial step on the digital transformation roadmap — its strategic relevance touches everything from distribution to operations to future business models. BaaS is a big opportunity for banks, third-party developers and alike consumers. But partial measures won’t do, to stay digitally relevant and preserve market share, most banks will need to embrace it fully.  

Guillaume Blot, Chief Digital and Innovation Officer at Sopra Banking Software