Paddy Vishani, Strategic Partnerships Manager, Yobota
The way we interact with our banks has changed dramatically over the past decade, and especially since the start of the pandemic, but what we expect from banks has changed, too.
Alongside the accelerated digitalisation within the financial services market, and with it the rise of fintechs and neo-banks, the Open Banking initiative has further pushed the agenda for free access to banking data. The commoditisation of banking services has unquestionably begun, with new opportunities for those who want to play in a space once reserved for traditional big banks.
Banking-as-as-Service (BaaS) providers have stepped in to fill the void, helping to build bridges between banks and these new players – a logical next step to streamline the customer experience and deliver engaging products built for the modern world.
Opportunity has come knocking for BaaS, but however compelling it may be, there are some important considerations to navigate as banks, BaaS providers and brands forge new partnerships.
Why businesses shouldn’t sleep on the BaaS opportunity
Banking technology is intrinsically complex and expensive to develop from scratch, while the difficulty of obtaining a banking licence presents a further obstacle for those looking to break into the space. By connecting businesses with banks that take care of the balance sheets and regulatory requirements, and providing the technology needed to effectively deliver financial services through digital channels, BaaS providers open the door for newcomers to a whole world of possibilities.
The implications for the wider financial services landscape will be vast. For one, it will make banking less transactional and more engaging. Businesses that have already established strong customer loyalty (take Nike, for example) can offer credit for a purchase to existing customers at the point of sale, without redirecting them to a different channel. By integrating services across the entire purchase journey, businesses will also deliver greater control and value to the end customer. These integrations will no doubt contribute to both scale and engagement: customers get what they need, where and when they need it.
Demand for embedded finance has served to drive momentum in this space recently, with industry players taking note of the appetite for sleeker customer experiences. Online purchases using Buy Now, Pay Later (BNPL) services are growing at a rate of 39% per year, with almost 10 million Britons in a recent survey saying that they avoided buying from retailers that don’t offer split payment options at the checkout.
So where does this leave banks?
BaaS companies generally share one end goal: to make it faster and easier for fintechs and other companies to broaden the portfolio of products offered to their customers by embedding digital banking services directly into their propositions. The benefit for these companies is clear – but what’s in it for banks?
Traditional banks were not built with the demands of embedded finance in mind and traditionally have little appetite for risk. By leveraging the power of BaaS providers to extend their functionality into new corners of the market and support features that customers and businesses value, they can join the digital revolution with ease.
Rather than competing with fintechs, BaaS allows banks to collaborate with their smaller and more agile counterparts while benefiting from the value chains created through embedded finance.
The role of partnerships in BaaS
White labelling is not a new concept. Yet its role in the BaaS space is far more involved; the extent and depth of these partnerships is unlike those we have seen before.
Critics might argue that this spells the beginning of the end for differentiated banking products. With so many players utilising out-of-the-box BaaS solutions, are all financial offerings going to look the same in the future?
Quite the contrary.
BaaS providers are on hand to do the heavy lifting, which in turn lessens the amount of development and configuration needed from brands. Yet the reduction of time spent on building the underlying tech architecture will boost, rather than reduce, innovation.
Top tier providers enable businesses to create completely bespoke offerings. The modular architecture of leading BaaS platforms means that brands can pick and choose which capabilities they need and tweak them to meet the needs of their unique customer base.
Herein lies the importance of choosing the right provider. A BaaS platform has many responsibilities: firstly, it must protect the Primary (the bank) by demonstrating that it can reliably ringfence the clients, their data, and all the processes which will be utilised by the Secondaries (the businesses). This means that the core banking provider has considered, from the outset, how it will support multiple businesses in the way that data is packaged, stored and processed.
The platform must also have been designed in a way which offers easy access to all the critical functions provided by the Primary. In most cases, the entry points will be in the form of an API (Application Programming Interface). If this part of the service is not optimally designed, it won’t provide the Secondary with the flexibility they need to realise their vision.
A fine balance must be struck between imposing constraints on a Secondary and letting them run wild. The industry must look to platforms that are suitable now, but extensible and scalable in the future – a key component of this is that the representation of financial products should be unbounded. For instance, do you want a variable APR on your load that is dynamically linked to your credit score? Do you want a savings account which pays your interest into an environmental fund?
The underlying message is that the credibility of both the technology and banking partner must be unchallenged to make a partnership work: only in this way will all parties be able to effectively leverage the potential of BaaS.
What’s possible with BaaS
New and existing entrants into the financial services market will be able to target niche communities more easily and produce narrower product sets. The use cases are virtually endless: car manufacturers can offer branded, one-click insurance at the point of sale, while prepaid card companies can now branch out into savings accounts.
Importantly, BaaS solutions give brands insights on how to improve their products. Reporting APIs can offer businesses detailed insights into how customers are using their services, giving them the ability to understand industry trends, saving and spending behaviours, and general engagement with these offerings. By putting their data to work, companies can consistently work to improve their customer experience and deliver more targeted products.
BaaS is the invisible engine of innovation within the banking and financial services market. As long as the underlying platform has the required credentials, banks, brands and customers will all revel in the possibilities provided by BaaS.
Paddy Vishani is the Strategic Partnerships Manager at Yobota – a banking technology platform utilised by challenger banks. He has experience in financial and technology consulting, specialising in change management and service implementation. He has worked in several areas within financial services including retail banking, capital markets and the treasury.
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