SUMMARY
Banks are increasingly providing API access to their financial services
BaaS is creating new opportunities for monetisation of banks’ data
Win-win scenario for consumers, tech-providers as well as banks
The digital age has been radically transforming every industry world over and so is the case with banking. Customers are increasingly switching to online and mobile banking resulting in decline of traditional banking services.
Further, proliferation of mobile banking apps and comparison sites are providing consumers with innovative and efficient ways of managing their money.
Envision the following use-cases:
- Anne getting a notification of her salary getting credited 2 days ahead of the actual pay-day.
- Hadid being able to open a checking account and receive cashback using an app on his cell-phone. He also obtains a checking-account card subsequently. However, he never visited a bank or didn’t have to submit any paperwork.
- A corporate finance executive for a garment business in mid-tier business town, can transfer payments and receive invoice-receivables using a mobile banking app.
All of the above and many more are getting accomplished across the globe as you read through this article. Thanks to the universe of Banking-as-a-Service (BaaS). BaaS is an end-to-end process that allows fintech companies and other third parties to connect with banks’ systems directly via APIs.
APIs have been around for decades but their application in banking was limited until the recent past.
The open source movement has triggered software vendors to make APIs available to anyone who wants to use them. Consequently, banks, including new digital banks, are increasingly providing API access to their financial services.
Changing The Face of Traditional Banking
The foray in BaaS space has been explosive. No wonder BaaS is being “termed” as API economy and the banking tech platforms that support these API-sets for tech firms’ offerings are called API infrastructure.
The word “digital” is largely inherent to banking now. With banking finally joining the online and offline fusion, let’s explore how it’s changing the face of traditional banking.
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- Regulators in banking space are calling for the traditional banks to share banking data (with regulations) with open market
- Banks are creating open platforms that host APIs to enable access to consumers’ data (in a regulated manner)
- Tech-provider & fin-tech firms are creating mobile-platform based applications that provide banking alternatives in B2B & B2C space
- Consumers, instead of transacting with traditional banks directly, are doing high-volume transactions via these mobile applications
A Stream of Opportunities
BaaS is creating new opportunities for monetisation of banks’ data and triggering the expansion of indirect banking. It’s a win-win scenario for consumers, tech-providers as well as banks. Furthermore, ease of banking has seen considerable improvement.
If established banks are to emerge triumphant in the new age revolution, they need to develop services their customers are demanding. Therefore, they are looking to form partnerships with fintech organisations – rather than looking at them as a threat.
BaaS is a great opportunity for those who embrace it, both in terms of revenue and overall growth.
BaaS, requiring the alliance of banks and fintech firms can open new revenue streams and help banks future-proof their business, while delivering improved services to customers
Having taken the US and Europe by storm, BaaS or open banking is replicating the effects in Asia as well. Monetary Authority of Singapore (MAS) has published an extensive API playbook that provides information on API platform Design & Architecture.
Many banks are provisioning an in-house API development portal like the one being used by tech firms and open-market developers for creating innovative banking offerings.
Relatively, the powers of API banking/BaaS are yet-to-be explored in the banking space of growing economies like India.
A Typical BaaS Platform
So, how does a typical BaaS platform look like or what does it entail?
- A set of transactional/informational APIs exposed by the banks
- Authentication mechanisms to access the APIs and encryptions to keep the data safe e.g. FDIC
- An analytics/reporting layer that is optional and facilitates data mining towards the usage of APIs
- An open-market tech-firm obtaining contracts to leverage bank’s APIs and creating banking services e.g. checking account, advance pay-day, balance-view, expense-vs-credit analysis, cashback, direct-global/local-transfers and so on
Summing It All Up
BaaS is revolutionising the space of B2B and B2C banking models thereby leveraging API-infrastructure of banks. Unlike ever before, more and more consumers are actively participating in day to day banking decisions.
Allowing for the construction of new financial products, BaaS is all set to enable banks and clients to build new, fundamentally different relationships and create a revolution in the field of finance.
[The article is authored by Prabhakar Mishra, Senior Vice President, Financial Services Solutions, Visionet.]
