BaaS Ushers In End-To-End Online Banking

Banks of every stripe are exploring the cost and other benefits of connecting with third parties.

Banking as a Service (BaaS) seems to be the flavor du jour for any enterprise that can describe itself as a bank. This extends from digital and mobile-only neobanks (N26, Starling, Monzo) to tech giants (Apple and Google) to incumbent banks (BBVA and Standard Chartered), all of which are sharing their data and allowing fintechs and other third parties to connect with them via application programming interfaces (APIs).

“The banking industry is changing. Traditionally, banks provided services based on their own internal systems and network of branches,” says Masha Cilliers, specialist partner at iBe, a financial services consultancy. However, “fintechs are now leading the way by providing all services via digital platforms and facilitating the end-to-end banking process online, which is sometimes known as BaaS.”

With service distribution digital now, branch networks have become a drag on profits, says Chris Truce, head of Fintech at Saxo Bank, a Danish firm specializing in online trading and investment. That makes BaaS an attractive option for helping banks seeking to cut costs and reduce complexities.

Saxo Bank offers a BaaS trading and post-trade services solution, enabling over 120 banks and brokers to leverage its technology and global capital markets access. While banks typically purchase software from external providers, Truce says BaaS allows banks to access not just the technology stack, but also the business processes and the people behind it.

Data Monetization

Every business needs to transform itself into a digitally consumable service, says Nanda Kumar, founder and CEO of SunTec Business Solutions. For banks, that means BaaS. “The basic capability any bank should provide in the future is to make all their banking and other services available and accessible to APIs,” he states.

Kumar, SunTec: The basic capability any bank should provide is to make all their services available and accessible to APIs.

BaaS allows the monetization of customer data, enabling banks to unlock opportunities presented by open banking, Kumar says. Rather than just providing a mortgage, for example, banks can help customers assemble a home fitting their aspirations, which could mean bringing in builders or real estate agents and even white goods and interior specialists. “All this can be facilitated by the bank,” Kumar says. “This is where they go beyond pure-play banking into needs-based banking.”

Kumar foresees customers getting paid for their data, with banks acting as ecosystem coordinators. “Banks have to continuously optimize this for everyone’s benefit and they have the opportunity to step up and be the custodian of customer identity and data,” he says.

SunTec works with banks to manage their value chain or value flow within an ecosystem. By working this way, banks can base their fees on the value they create and their relationship with the customer.

Kumar argues that banks can follow the Google and Facebook models, in which the primary service is free but value is made from indirect services. Similarly, banks can monetize their relationships with customers and their data.

Pricing models for BaaS depend on the user’s goal, says Andy Schmidt, global industry lead for banking at CGI, a global information technology consultancy. “For banks, the goal is to keep pace with, if not get ahead of, open banking opportunities before the competition does,” he says.

Partnering with fintechs to obtain these abilities by opening up the bank’s platform is one of the keys to success, according to Schmidt. But he warns that pricing models currently on the table don’t fully accomplish either goal; simply granting access to the entire platform implies that all APIs and services are created equal, while pricing by the service creates a dynamic where promising APIs are overlooked.

“A hybrid model may be the best way forward,” says Schmidt, with “a modest monthly fee, bolstered by a more robust fee per service element, to give fintechs access to the specific elements they need, as well as an incentive/opportunity to look at the other APIs the bank has to offer.”

BaaS enables banks to offer more flexible terms on payment and usage. A revenue-sharing model means that Saxo Bank’s institutional partners can first focus on offering their customers new services and nurturing them before payment plans kick in. “As the usage goes up, their revenue goes up and costs go up. And then as we move more into a partnership, we can have a discussion around the pace at which costs go up against revenue,” Truce says.

One client, Standard Bank, approached Saxo to help launch a new business vertical, offering global stocks for retail investors following the relaxation of South Africa’s offshore investment restrictions in 2008. Today, Standard Bank offers multi-asset services either directly or through an introducing broker. In addition to self-branded Saxo front-ends, Standard Bank also recently integrated Saxo services into its own banking app via API.

Early BaaS innovators Fidor Bank and solarisBank demonstrated that developing a platform for fintechs and other interested parties, such as merchants, to build their own solutions and services can create new revenue streams and customers.

Start With Your Strategy

How banks offer their capabilities as a service depends on their strategy: Do they want to become more operationally efficient or more customer-centric?

“If you are a bank with excellent internal systems and controls,” says Kumar, “you can become a substrate for other businesses, providing the banking service per se and the platform as a white label. Banks that choose to be more customer-centric will have to stretch their boundaries beyond financial needs.” That suggests they will need to decide if they want to be a provider of the basic utility or expand their horizons to directly serve customers’ needs in the future.

“BaaS, or platform-based banking, is much more innovative in terms of the consumer experience, and in most cases is easier to set up than a traditional bank account,” Cilliers says. “In the future, we expect there to be more cooperation between existing banks, which have earned consumers’ trust, and fintechs, which are providing the most up-to-date banking services.”

The fact that BaaS entails sharing customer data with third parties creates regulatory dilemmas, however.

“BaaS is very interesting and challenging due to the level of regulatory oversight, particularly in times of substantial regime change, e.g., Brexit,” says Vincent Kilcoyne, executive vice president for Product Management at SmartStream. “Due to the volume of underlying data and the potential for fraud and data-related violations, it is essential that providers have the necessary tools to ensure they have the correct data—particularly at times when the BaaS provider migrates data across versions, but also when they take on substantial datasets.” As evidence, Kilcoyne cites the 2018 IT upgrade by TSB, a UK retail bank, which resulted in 1.9 million customers being locked out of their accounts and 1,300 having money stolen by cybercriminals.

“At SmartStream,” says Kilcoyne, “our solutions are designed to provide BaaS providers with access to the correct software assets and intelligence through multiple delivery models, to ensure optimal quality of service and ensure that all new business is onboarded in a controlled manner.”

Outsourcing digital work to what are effectively AI engines and algorithms also raises accountability issues. The conversation on this point, which is only beginning, will be similar to the debate concerning self-driving cars, over which the manufacturer has a certain level of accountability, Kumar believes. Banks considering offering BaaS will have to factor these risks into their business model as well.

The flip side, of course, is the risk taken by banks that decline to adopt BaaS: They could be held back by siloed legacy IT systems, fail to meet customer experiences, miss out on new revenue streams and find themselves overtaken by more agile competitors.