Banking as a Service, Banking as a Platform, and Open Banking are terms that have become frequently prevalent in the financial lexicon. Yet, there is often confusion around what exactly these terms mean. In this article, we will break down the definitions of each of these terms, including some examples and use cases, while also exploring what they mean for the financial services sector as a whole.
What is Banking as a Service
Banking as a Service (BaaS) can be defined as a white label banking service, where a regulated banking institution makes its licence and infrastructure available to (typically unregulated) third parties.
Utilising this strategy, the third parties, such as fintechs, digital banks, or other non-bank business’ can build their own products based on the foundations provided by the bank – integrated via APIs.
Who benefits from BaaS?
BaaS is seen as a convenient option for new entrants to the financial services sector. This way they can quickly enter the market without having to acquire their own licence – often a lengthy process.
As such, clients typically consist of early stage fintech startups, or non-financial businesses that are keen to integrate financial services with minimum development.
An Example of BaaS
Starling Bank, the UK-based neobank, launched a BaaS service named “Starling as a Service” in 2018. Opening up its APIs, Starling has enabled other challenger banks, such as Ditto, to launch using its licence and platform.
Starling differs from traditional BaaS providers, like Solaris, as it was not initially a BaaS provider. Starling is an example of a bank with a modern core expanding into BaaS services.
Limitations of BaaS solutions
The commercial agreements of BaaS providers will inevitably reduce profitability, and the complexities of decoupling usually lead to vendor lock-in.
What is Banking as a Platform
As a relatively new concept, Banking as a Platform (BaaP) appears to have a few similar but not-quite-the-same definitions floating around.
One view is that banks are the platforms themselves, and provide their products in other channels. However, the most prevalent view is that BaaP refers to the bank integrating third party services (typically offered by fintechs) into their system.
Banking as a Platform is, essentially, the inverse of Banking as a Service, whereby the bank integrates third party services into its own system using APIs.
Operating as a net consumer of partner APIs and open banking, this business model allows the bank to quickly explore new, digital services with the help of third party partners. As a result, the bank is able to rapidly offer new services and/or explore new markets, whilst still owning the customer.
Some key characteristics of this platform model are:
- Cloud hosting
- Built on open architectures
- Charged on the actual volumes needed
Who benefits from BaaP?
The benefits of this business model can be threefold:
- End-customers receive new, better, personalised products and services from their banks
- Fintech companies can sell their products to incumbent banking institutions for profit
- Banks improve their customer experience whilst saving money on development and support and freeing up internal resources
BaaP is seen by many as being an answer to incumbent banks’ inability to keep up with the more nimble neobanks which have emerged over the past decade.
An example of BaaP
The use of these solutions allows banks to shift their focus from the minefield of AML and KYC compliance in order to focus on their customer offerings.
What is Open Banking?
Open banking refers to the process by which banking institutions share customer information with third party providers with the account holder’s explicit consent.
Although open banking has many similarities to BaaS (both involve the use of APIs to communicate among banks and fintechs), the purpose is different. BaaS enables firms to offer banking products, while open banking gives access to data.
Using open banking, service providers have been able to aggregate and analyse data and thus build accurate consumer profiles. As a result, they are able to offer consumers more relevant services and improve the overall customer experience.
An example of open banking
Common open banking use cases include finance apps which are able to analyse spendings, plan a budget, and make relevant suggestions on adjusting economic behaviour.
An example of this is the popular Cleo app, which helps users to budget, save, borrow, and build credit by generating actionable insights based on the users spending and saving habits.
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