1) What is BaaS, in your words?
So many people refer to Banking as a Service (BaaS) as everything a bank needs to function in one box. It’s not that.
BaaS is a set of services that require a banking license to support them. This is how banks can sell their financial capacities to non-bank entities, such as retailers or traders. Or other financial services, like the challenger banks, who want to expand their product line without a huge administrative regulatory headache. This could include anything from payment processing and credit to insurance and pensions. This is regulated funding, which can be provided through an unregulated entity. The clue is in the name, banks are providing their license as a service – so brands can better serve their customers.
There are three ingredients in BaaS. You need a banking license that you are happy to use. You need technology that makes it easy (that’s where 10x Banking comes in). And you need one-on-one services to sit down, giving customers a lot more choice.
2) How is this changing financial services?
Entirely new business models are created. Banks were primarily B2C or B2B. But more and more, they are becoming B2B2C or even B2B2B2C.
We’ve seen how much traditional banking has suffered in recent years – often driven by legacy technology that slows down employees and frustrates customers. Nowadays, customers are more and more accustomed to more direct interactions. No middlemen. No unnecessary steps – and they want transparent financing options. And that may well mean dealing directly with traders, for financing the purchase as well as for the purchase itself.
BaaS offers a way to do just that alongside traditional finance.
BaaS is a sustainable and long-lasting way to attract and retain customers with a large market of financial services and ideas. And like all the best marketplaces, the ones you won’t want to leave will be the winners. If you are the platform provider, you want yours to be the most attractive and therefore the most competitive.
To achieve this, banks can bring in merchants and products that compete with, or even compete with, the traditional bank offering which is totally different from the old way of doing things. But in this new model, it is necessary to keep competitive banking platforms and abundant consumer options.
The fundamental tenet of BaaS as a concept – and a regulatory imperative – is to give the consumer much more choice at a lower price.
3) What does this mean for banks, brands and end customers?
It is an exciting time for customers. This means that you or I could have a financial product which is not necessarily provided by a traditional bank but linked to it. All the benefits of fully regulated and supervised products, with less hassle. More choice. And potentially a lower price. It’s a real win-win-win.
For brands and traders, of course, it is also an exciting time. As if by magic, they can offer customers credit from a regulated bank. It reduces risk and increases sales with just one move. And for banks, it’s a new way of doing business and becoming profitable in a new vertical. Something they’ve needed for a while! To be part of the ecosystem and remain relevant, heavy financial institutions must enter the arena of integrated finance: either as platform providers (which we need little) or as service providers ( and here there is room for a lot, but the competition is raging!)
4) Who is leading the way?
Well, first of all, those savvy businesses that have a banking license in their portfolio – and you’d be surprised how many there are! They get a lot out of BaaS and integrated finance.
And second, I would say traditional banks that see the opportunity to pursue a parallel business model and have the leadership and vision to continue it! These banks may not have experienced huge growth as banks and now they are seeing the benefits of BaaS and it is giving them a new lease of life. A digital makeover.
5) Are some banks, geographies or markets better prepared to take advantage of this trend?
In terms of geographies, it is growing every day. But if you want to find the next big hotspot, look at the financial regulator. Who is this BaaS evening is hosted by. Even if the regulator does not attend the ball, he facilitated it. They allowed it. They created the settings for what was needed to make it work, what was expected, and what good looked like.
Thus, we see the most progress in jurisdictions where the regulator has allowed connectivity for open banks and connected economies and has allowed these business models with an eye on consumer welfare. This gives banks, tech platforms, and traders the boost they need to get started.
6) What does integrated finance mean for banks?
Integrated finance – the integration of financial services into other environments and ecosystems – is a game-changer for banks. Of course, that means they can sell their banking services in entirely new ways to new players with BaaS, creating more revenue streams. But it also means that they can transform their own end-to-end experiences as well. Every process down the line can get better, cheaper and more efficient.
Capturing data and using machine learning opens up a world of opportunity. Banks can make hyper-personalized product suggestions to customers in real time. Insurance companies, for example, can perform much more detailed credit reviews, reducing their risk. Economies of scale are so important that they can be difficult to understand.
7) Should banks be cautious or enthusiastic about BaaS?
Excited because there is a whole world of opportunity and potential at your fingertips. Not just in terms of new sources of income. But with game-changing technologies. And bravery will be rewarded in this space. There will be a huge starting player advantage.
And unlike this first player advantage, slower banks need to be careful because there is only limited space at the table. Not all banks will be able to build and scale a successful BaaS product, because not everyone needs it that much. I don’t think we’ll ever get to a single platform economy, but I don’t think we’ll see a huge proliferation of platforms either.
Another important factor for banks to consider is that the economics of this situation is very different from how traditional banking products make money. The way volumes, fees, and revenue splits work is just very, very different. And the biggest mistake a bank can make is to try to transpose the traditional economy on this, so here too some caution is in order!
8) How should they go about entering space?
The technological part is the part that banks should partner on, freeing up space to deliver their new business model.
The hard part is figuring out what your market should look like. If you are a bank, you have to recognize that you will be dealing with a new economy and that it is not banking as usual. You need a very clear sense of the mission and purpose of how you are going to bring this alternative business model to life. And that’s where the value is.
9) Why should banks seek to integrate BaaS into their business?
Banks undoubtedly have the advantage of getting started quickly (no pun intended) and offering more services to customers. If they are successful, there is everything to be gained. Imagine if a bank hosted a platform with tens of thousands of plug and play financial options. Everything from the customer’s coffee in the morning to the mortgage on the house they sleep in could be perfectly backed by one bank.
Thousands of service providers. But a bank. A market you would never want to leave because you have all the choices you need and the ease you want, all in one place. It’s the dream with BaaS. Thus, banks that strike this new business model early could see an incredible increase in their profitability and relevance, if they position and adapt this right.
But BaaS also comes with a warning for slow engines. Due to the one-stop-shop nature of these platforms, little will be needed. The number of seats at the table is limited. So, it pays to be bold, do your homework, and have a vision for the future. Now is the time to be proactive, not reactive.
10) what’s next for space
The next step is adoption. And that adoption will be one where consumers become more and more familiar and comfortable with markets and discover how to navigate them.
And then the second element will be integrated financial conversations becoming much more real. What we expect to see now is a much more intuitive interdependence between services – where your behavior here could trigger your insurance product there, which could offset your mortgage here – in a way that seems transparent. So as to put the power back in the hands of the consumer. But for that to happen, we need the consumer to be comfortable with the markets. And to understand these interconnections and to consent to them in full knowledge of the facts.
We need these markets to become dynamic. We need participants to continue to understand the economics of how collaboration works, and we need actors to become more and more comfortable with interdependence. We are an industry where everyone has had a fortress mentality for a long time. And everything we’ve talked about today is about interdependence.
Embracing interdependence is not an easy decision. And regulatory securities need to be explored because we are talking about savings and people’s livelihoods. We can’t go wrong, going fast and smashing things doesn’t work in this industry. Go fast, don’t break anything. So we need that adoption and oversight. We need this creativity. We need these economics to function, but I think as banking as a service becomes an accepted, understood, and fairly established business model for banking, we’ll see this creativity explode and mainstream finance, really becoming a thing.
About Dr Leda Glyptis. As head of clientele for 10x Bank, Leda describes herself as afintech nerd who “cares deeply about people, ideas and does things the right way for the right reasons”. She holds a doctorate in politics and 20 years of experience in finance and economics.