Banking’s long road to BaaS
I first pushed the idea of franchising banks in 1995 and I’m sure someone else in banking would have had similar thoughts before me.
The pitch was simple, the big four banks have huge IT capability why not leverage other brands customer base so they can provide “white labelled” banking. A few years later RBS tied up a deal with Tesco to provide banking through the retailer’s customer base and stores. However the term Banking-as-a-Service (BaaS) was arguably first coined by Chris Skinner in 2009 and he identified that banks could provide smaller services like international transfers or cheque processing: “all bits of banking, all prices and packaged to plug and play as a service”.
Then it was around 2016 that bank-as-a-service.com produced a whitepaper detailing the concept further and providing early adopter examples, the whitepaper is still worth a read. Next Andreessen Horrowitz presented the concept that “every company will be a fintech company”, which really highlighted that the opportunity for BaaS was much broader than banking and financial services. Around about the same time, David Gailbraith of Anthemis wrote “Embedded Finance – The Future of the Economy” (another great paper well worth reading).
Given all of this history and available content you would imagine banks are well prepared to take advantage of this huge opportunity?
For incumbent banks to move to BaaS, there are a couple of big challenges. The first is their core banking systems. With the opportunity to embed banking into every industry there is a need to scale well beyond the customer base than the bank serves today. This requires both hardware and software scalability and the ability to provide more granular services independently for example credit scoring or anti-money laundering as well as products like accounts and cards. The solution is simple, adopt a modern cloud native solution. In previous articles I have covered what this entails in more detail.
The second problem is arguably the bigger challenge and possibly why we are seeing more banks hire key personnel from big tech companies – and that is, operating a BaaS business.
Banks have really only ever sold banking products to customers, be they retail or corporate customers. Being a BaaS provider is essentially selling access to software and hence a different operating model. This requires three key elements:
- a software infrastructure;
- strong developer community support;
- new sales and marketing team.
The software infrastructure is not only a modern banking system with application programming interfaces (APIs), but also everything that is required to secure, publish, manage, monitor and meter/bill for access. Again, technical solutions are available, but banks will have to put in place people and processes to manage the API infrastructure.
Next to support developers building solutions on top of the banks APIs/services there needs to be great developer support. This must go beyond simply publishing API documentation which is all that many banks did in the early years of open banking. Aside from sandboxes to test their integration to really drive adoption banks will need to provide training and support and even host developer conferences. ABN Amro boasted over 800 developers at its conference where I presented in 2018.
The third element is the hardest for banks as this requires a sales and marketing function that understand how to sell and promote Software-as-a-Service (SaaS) solutions. Everything from pricing, to targeting, contracts and service level agreements will be alien to banks starting on this route to BaaS. Hence, today banks are already competing with tech companies providing BaaS and some of these already have banking licences.
When the new banks like Starling and Monzo arrived they very much talked about being “tech companies with a banking licence”. What this largely transpired to be is that they built their own core banking solutions into a modern architecture using microservices and cloud platforms.
This was probably the right thing to do at the time as players like Thought Machine and 10X were in their infancy. However, this is not the problem now with so many new platforms available banks are spoilt for choice for solutions. The real challenge is operating as a software company, because this is not only a change in people and processes but a very different culture to banking. Hence, the actual technology (software) is not the challenge, it is the implementation of a different business model that is key.
I guess I’m just saying the opportunity for BaaS is huge and compelling no doubt, but the journey to get there for banks is long and complex.
About the author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.