Banking-as-a-Service (BaaS), a model where banks publish APIs to allow third-parties to access their services and data securely, is a key enabler of open banking and embedded finance. With the majority of banks showing interest, the BaaS market, is expected to grow multi-fold in the next decade.
This growth seems like a given because as a secondary service underlying almost every transaction, banking naturally lends itself to embedding.
Another factor supporting the growth of BaaS is that embedded finance, which it is part of, enjoys the favour of all parties: customers, because they get a banking experience that is seamless with their primary transaction such as buying a phone or vacation package; merchants, because they can acquire new customers and revenues with options like buy now, pay later (BNPL); and banks, because they can grow their business by embedding their offerings within the consumption journeys of other brands.
As the technology partner to financial institutions around the world, a question we are frequently asked is how to successfully launch, scale, and differentiate a Banking as a Service proposition. What we tell our clients is that the important thing is realizing that BaaS is an evolutionary journey, rather than a “one and done” exercise.
Let me explain:
Based on our experience, we believe that incumbent banks should launch their BaaS journeys in partnership with a select set of fintech companies, neobanks, or digital giants that are already active in this space.
At first, the goal should be to introduce basic services, such as checking accounts, debit card payments, and unsecured lending, through these partners to build a foundation for API banking as briefly described below:
The starting point is to develop the APIs for the shortlisted use cases. As far as possible, banks should standardize their APIs in alignment with their partners’ requirements, so it becomes easier to work with, and also add, partners in the future.
Good discipline, by way of robust documentation and adherence to product management principles, accelerates API maturity.
There needs to be a strong focus on performance, because even a slender technical failure rate impacts experience disproportionately. As an illustration, consider a digital payment that doesn’t go through instantly. Even though this happens very rarely, both payer and receiver are anxious until the transaction is completed.
A dedicated API banking team is required to support the bank’s partners in innovating further use cases. In fact, the most progressive banks even have API sales teams for business development.
Finally, a modern core banking platform – with RESTful APIs, and event architecture – is a big asset, since it enables the bank to set up its BaaS proposition quickly, at low cost and effort. In contrast, while a bank running on legacy technology can also create APIs, it will have to spend a lot more effort to do.
Banks with an adequate API foundation should then scale their BaaS offering on both demand-side and supply-side ecosystems. On the demand side, this involves expanding the number and types of partners to include – in addition to fintech and digital giants – ERP software, TMS providers, human resource management solutions, etc.
Accordingly, a bank which allied with a limited number of high impact partners at launch, will scale by working with large, and also niche, players. Importantly, it will have already standardised and exposed the relevant APIs and webhooks for the use cases being explored with each of these partners.
Basically, the bank, which used the launch stage to learn from its biggest partners, will now leverage its new partnerships to scale the business. This is what India’s ICICI Bank is doing by working with more than 100 partners just for building SME banking use cases.
Equally, banks need to develop the supply-side ecosystem, particularly because their clients may want services other than what they (the bank) provide. Sometimes these services may be something the banks use internally, such as the taxation database or SME registry in the country of operation, access to which they could offer to clients via APIs for a fee. The addition of adjacent capabilities like these will make banks’ API channels more attractive to customers. Some progressive banks are going further to offer even competing services through their channels.
That being said, the vast majority of banks are still in the early stages of launching a BaaS offering. Nonetheless, they should start thinking about a roadmap for scaling, and following that, differentiating, their proposition.
Although BaaS is currently in a hype cycle, it is likely to start maturing shortly. However, it will not eclipse the other channels anytime soon. In that case, a BaaS offering’s differentiation will depend on the breadth and depth of its (bank’s) APIs and webhooks, and ease of partner onboarding.
Today, even the most advanced banks take six to eight months to onboard a partner, instead of the ideal two weeks. There is also a need to standardise and streamline information security requirements, so partners don’t spend excessive time and effort in conforming to those expectations. While they are not there yet, it is expected that the progressive banks will achieve these goals in the near future.
For differentiation in the long-term, they will need to exert further to exploit two things, namely the network effect and the learning effect. The first is an outcome of broader supply-side and demand-side ecosystems; the more numerous the supply-side participants in a marketplace, the more valuable it is to the customers in the demand-side ecosystem, who are able to meet multiple needs through a single partnership (and way of working). Basically, the bank differentiates its BaaS offering by expanding its services to include a variety of adjacent non-banking services such as wealth management and insurance.
The learning effect comes into play when banks expand their supply-side networks and leverage the deeper understanding of partner needs to curate services more effectively. For instance, a bank working with several HR management systems may find that payroll processing APIs should be curated differently than general payment processing APIs. Since the learning effect depends on a bank’s unique ability to use insights, it can set a bank distinctly apart from the competition.
But all of that is still in the future. Banks, which are expressing keen interest in the BaaS model, must implement and scale it with alacrity. Customers want it, merchants are asking for it, and if the incumbent banks don’t respond, there are plenty of next-gen players who will be more than happy to provide it.
To learn more about framework to scale BaaS, download our report, Developing Innovative Digital Banking Business Models
By Puneet Chhahira, head of marketing and platform strategy, Infosys Finacle
Puneet is the global marketing and platform strategy leader at Finacle – Infosys’s digital banking products unit that serves financial institutions in over 100 countries. He has led multiple roles across consulting, product management, marketing, startup engagements, and platform strategy during the last 16 years at Infosys Finacle.
With his close collaborations with global banks, start-ups, and industry thought leaders, he brings along a deep understanding of the evolving financial industry landscape and how modern technologies can help unlock new possibilities.
Before joining Infosys, Puneet was a business head at Bajaj Allianz Life Insurance – one of the largest life insurers in India.
He holds an engineering degree in computer science and specialised in marketing and finance during his post-graduation.