Banking-as-a-Service 101
Published: February 19, 2021
If you’ve not heard of Banking-as-a-service (BaaS) yet, do not be alarmed. It’s a relatively new concept that is still mostly concerned with retail banking. But its application for transaction banking is beginning to create waves.
TMI wrote about Goldman Sachs’ all-new ground-up transaction banking build in October and again in November of last year. The articles concluded that, with its fully digitally native transaction banking platform, BaaS was an obvious step for the bank’s first foray into this space. And it will be so for many more banks as they ponder their digital futures, especially as the pandemic has accelerated agendas for digitalisation, in both bank and non-bank worlds.
However, while the rising number of bank/fintech partnerships may suggest otherwise, some banks may still secretly harbour a fear that non-bank incursions into their space will see them disintermediated.
Big Tech players and vast online retail empires certainly have the upper hand when it comes to really understanding customers. But banks are hardly going to sit idly by as the likes of Amazon, Walmart and Alibaba steal their lunch. Purely on the premise that if you can’t beat them, join them, BaaS is surely now in the ascendancy.
Alongside Goldman Sachs’ transaction banking activities, there are already a number of retail banks, such as BBVA in the US, and Solarisbank, ClearBank, Railsbank and Starling Bank in Europe, that are ringing the changes.
Clearly there’s a way to go before BaaS becomes the norm in retail, let alone transaction banking. But in case the concept has not yet crossed your path, here’s a quick 101 on what it means.
It’s all about the APIs
The bottom line with BaaS is that banks open up their application programming interfaces (APIs) – the technology that lets one application communicate with another – for non-bank providers (other businesses such as online retailers) to access and offer new real-time services to their own customers.
In a BaaS relationship, the end-customer is still ‘owned’ and managed entirely by the non-bank. This is ideal because no one understands the needs of a business’s customers quite as well as the business itself, and no one understands financial services like the banks. By using APIs to offer embedded banking services directly to its own customers through its app or website, the non-bank gets to keep its relationship intact, but offer the best financial services it believes are needed, when they are needed.
BaaS is thus about delivering point-of-consumption banking services: there is no gap to plug while the customer goes off-site and waits for these services to be delivered. A supplier, for example, might use an API within its own online environment to offer a customer mobile banking, card payments, lending, FX services, fraud detection and compliance services, all from its own bank, or an aggregation of several.
That supplier keeps its own customers happy with fluid transactions made on its website or app, and the bank or banks get to offer new instant services to new customers. And bank and client can both harvest data which may, for example, be used to help develop and offer new services and revenue streams.
BaaS is not the same as open banking though. Both share the use of APIs, but open banking sees APIs used by third-party providers (TPPs) to consume bank data as part of their product offering to their own customers. An open banking service would, for example, let banks provide data to TPPs, via APIs, to enable account or balance aggregation. In the treasury context, this is extremely useful. But TPPs are just about the data; they cannot provide banking services.
In theory, non-banks can offer such services. But to offer them, a banking licence is required. This is why BaaS operates as a stack with a licensed banking institution underpinning it all. A wide range of its (or its partners’) banking services are then consumed, via APIs, through the business client’s app or website.
That client’s brand, to all intents and purposes, is all the end-customer sees. The non-bank may thus appear to its customers to be offering its own wide range of branded banking services, but it is all white-labelled. It is simply using APIs to enable it to connect with, and act as, an intermediary for banking services – hence Banking-as-a-service.
BaaS in treasury
By embedding real-time financial services into their service offering via APIs, non-bank suppliers can expect more customer engagement. Offering new services such as flexible finance at point-of-sale, or bespoke credit lines on a trade platform, with ancillary services such as FX and compliance monitoring, all without leaving the site, is a valuable proposition. Indeed, it’s a perfect scenario for sales and credit control teams.
And it also helps production, inventory and logistics teams understand what is shifting and when. Both the company and bank have data to support investment or scaling back in each process. And by having a direct link between the paying customer, the bank and the corporate’s cash application process, there are clear advantages for treasurers looking to optimise working capital, forecasting, and liquidity management. For an excellent introduction to BaaS, this slide set from 11:FS has much to offer. It is pitched at bankers, but it makes good reading for treasurers exploring this idea because it offers insight into how banks will be approaching BaaS. And they will.