Innovative boost in technology applied to financial systems has been growing at high levels and making great progress around the world for a few years so far. Changes in customer expectations, new ways of doing business, value creation and the significance of financial inclusion have fueled an expansion of financial digital services. Banks, for instance, have understood that it’s vital to migrate their traditional customers to a secure and friendly digital environment, evolving into the new era of financial services is a latent need.
Are you familiar with the concept of Banking as a Service, also known as BaaS? Thanks to this innovation, organizations no longer need to build their own IT infrastructures from zero and can start operating in digital markets with immediacy and flexibility to adapt to their users’ needs. Among the emerging technology trends that have the potential to transform the banking system in the coming years, none has the strength to revolutionize the system as BaaS.
How BaaS works? It consists of offering banking services, such as payments or credit as a service through APIs, so that non-banking organizations can offer their customers services such as debit cards, mobile bank accounts, loans and payment services, without the need to acquire a banking license. The model involves three main actors: the banking or financial institution, a technology platform provider, and a service consumer interested in integrating banking services into their value offer.
Why is so important? BaaS seeks to reduce the complexity of banking products and to expose them to create consume in customers-friendly services. In this way, licensed banks integrate their digital banking services directly into non-bank products, this has challenged them to transform their vision of the banking business due to the new opportunities that have been emerging. In this sense, the development of BaaS has a significant amount of positive effects, which will shape the future of traditional financial institutions, emerging FinTech’s, digital-based companies that incorporate these offerings and the users who finally access financial services and products under this new model.
For these reasons, this model is increasingly gaining importance around the world. According to Capgemini’s World Retail Banking Report 2021, public acceptance for FinTech and large technology companies who have adopted BaaS over traditional banks is:
· 5% of tech-savvy consumers use at least one financial product from a big tech company
· 70% of customers choose non-traditional bank options for lower fees, 68% for better user experience, and 54% because of speed.
· Over 80% of consumers that would switch financial services providers in the next 3 years already use a banking product from a big tech firm or digital bank.
It’s a fact that we are undergoing a digital transformation, and banking is no exception. According to Charles Potts, Senior VP and CIO of Independent Community Bankers of America (ICBA), banks need to unlock new value by leveraging ecosystem capabilities. He states that “The two most important priorities of BaaS strategy are designing innovative products and reaching more customers. Therefore, banks need to forge partnership with FinTech’s to effectively and efficiently develop customer-facing solutions and leverage these partnerships to acquire new customers”. And the statistics demonstrate this trend:
The implementation of this new business model implies that banks must make administrative and investment efforts to take the next step in digital transformation, allowing them to be competitive when adopting this new initiative. However, significant challenges arise when it comes to generating competitive advantages within the industry, such as regulation and standards, in the case of the United States, banking regulation is highly decentralized, regulated at both the federal and state level. The U.S. Securities and Exchange Commission (SEC) is responsible for monitoring, especially, investment/banking platforms that are not backed by the Federal Deposit Insurance Corporation (which insures deposits and protects investments). Given that the regulation of financial services in the U.S. is based on safety, soundness and consumer protection, it is still a topic that is taken with caution, due to the fact that the largest banks (e.g., Bank of America, Wells Fargo, HSBC, etc.) are highly regulated, while FinTech’s have much more freedom to move into cloud services, IoT (Internet of things), among others.
The truth is that the adoption of a BaaS model is a challenge for any banking institution. Implementing it not only represents multiple benefits such as agile digital solutions, savings and investment, online banking for individuals and corporations, mobile banking, foreign exchange and remittance management, digital payments, but also represents challenges to capitalize on these digital channels that have been transforming the business. Below we can compare benefits and challenges of BaaS adoption for the financial ecosystem:
It’s undeniable that this is an issue that is changing the financial system. It brings advantages for banks, for FinTech’s and for customers. For banks, it allows them to offer new services, both B2C and B2B, and FinTech’s are significantly accelerated with the launch of their services and products. As for customers, it is reasonable to think that the more players and variety of services on offer, prices and products will become more attractive.
The future is here. Banking revolution is a fact, an increasing number of banks have eliminated existing barriers such as complex usability, data insecurity and long lines at their branches. There is still a long way to go, it is not surprising that soon the access to banking will be through virtual assistants and intelligent interactions that will allow users to manage finances and make any operation in a more human and natural way. The important issue today is no longer the banks, it is the innovative services they can offer to their customers, partners, allies, FinTech’s and other banks.
If you are looking to maximize the value of your business with a range of high-quality technology services, at Interfaz we have Digital Transformation consulting and we can guide you on the journey to digital maturity by engaging in critical areas of your business to improve your competitiveness and boost your potential.
· BBVA APi_Market “When the bank is not important”
· Capgemini’s World Retail Banking Report 2021
· Insider 2021