Digital transformation is happening across industries. It democratizes data, enabling greater transparency and better customer experience. Emerging startups and third parties have access to legacy systems, and in some cases, data is directly available to consumers.
Banking-as-a-Service platforms (BaaS), which offer more transparency in financial services, have emerged as a key component to open banking. These platforms allow account holders more financial transparency by opening up their application programming interfaces (API) for third parties to create new services.
Digital banks and fintech have been disrupting traditional business models and have been invading incumbent banks. However, by entering the BaaS space legacy banks that are tech-savvy can turn this threat into an opportunity.
What is banking-as-a-service?
BaaS is an end-to-end model that allows third-party digital banks to connect directly with banks’ systems via APIs. This allows them to build banking offerings on top of the provider’s regulated infrastructure and unlock the potential for reshaping global financial services.
By moving into the BaaS space, tech-savvy legacy companies can fight the growing threat from fintech. They can share their data and infrastructure. This level of information will soon be available to digitally native customers in a matter of years. Banks that start now will likely be rewarded with high demand and competitive advantage.
How does banking-as-a-service work?
BaaS starts with Fintech, Digital Bank another third-party provider (TPP) paying a fee to access the BaaS platform. The TPP opens the APIs of the financial institution to enable them to access the information and systems necessary to create new banking products and offer white-label banking services.
Legacy institutions that create their own BaaS platforms in addition to gaining an advantage in open banking are also opening up new revenue streams. BaaS has two major monetization strategies: charging clients a monthly fee to access the BaaS platform or charging a la carte for each service used.
Also read: Top 5 Security-as-a-Service Providers
Top banking-as-a-service providers
These are the top BaaS platform vendors, broken down into BaaS-focused financial players and retail banks that have launched their own BaaS channels.
Top BaaS providers:
- 11:FS Foundry
BaaS providers that offer B2C services:
- Starling Bank
- Fidor Bank
Banking-as-a-service industry outlook
Open banking regulations have been introduced in a number of countries, and the financial services industry is shifting towards an era in which shared data and infrastructure will be consumers’ new expectations.
Legacy banks with tech skills that have created their own BaaS platforms will not only be able to take advantage of the open banking opportunities before their competitors but also create new streams of revenue through the monetization of their platforms.
The UK’s new revenue potential from open banking-enabled small and medium-sized businesses and retail customer propositions was PS500m ($700 million), according to PwC. Insider Intelligence predicts that this will grow at a 25 percent compound annual rate to reach PS1.9billion ($ 2 billion) by 2024.