Banking-as-a-service: A Shift in Financial Consumer Culture

There’s a hot trend that’s gathering significant traction in the global financial services industry that has the potential to completely revolutionize banking experiences as we know it, while also being a key monetization lever for financial services providers and virtually every company that requires a banking service. According to venture capitalists Angela Strange of Andreessen Horowitz and Matt Harris of Bain Capital Ventures, `this trend, christened embedded finance or banking-as-a-service, has the potential to essentially “make every company a fintech company.” Every business interacts with money in some way, and therefore needs a banking service. If providers can latch onto this opportunity and make those services as frictionless as possible, they can meet key customer needs in a seamless fashion : the provisioning of hassle-free, easy banking, across multiple platforms, rather than the fragmented user experiences customers currently have to bear.

This is the new world of banking; a plug-and-play model for banking services where third party providers – FinTech, non-FinTech, developers, etc. – can access and execute financial services capabilities without having to build requisite resources from scratch. This means these third parties can integrate digital banking and payment experiences into their own products via Application Programming Interfaces (APIs). In this new normal, companies can outsource high level banking, fraud and risk management capabilities to more competent legacy and technology partners who already have the advantage of expertise and  scale. Thus the former can focus on their industry functionalities while leveraging core banking services that are easily accessed through APIs. The banking-as-a-service model leverages the existing standardized infrastructure maintained by legacy players to provide optimized user experiences across a wider range of banking and financial services including; account and transaction services, digital wallets, personal financial management apps, lending and payments.

Under the banking-as-a-service model, companies can pick and choose specific features to fulfill a specific business need, or merge multiple solutions to create an entire neobank if they wish. One use case for banking-as-a-service is in consumer lending, where businesses that sell large-ticket items like furniture and consumer electronics can leverage banking-as-a-service to provide on-platform, whitelabel, point-of-sale financing to customers using a consumer lending API. Under this arrangement, the loan provider underwrites and potentially finances the loan, helping the business convert a sale. The business also has the opportunity to facilitate a frictionless user journey for their customers without them having to switch platforms, as this has the potential to fragment the user experience – in the specified instance, the user would have to seek financing from a bank via a separate channel.

The notion of open banking and API uniformity, which seeks to guarantee a seamless and interoperable user experience across multiple platforms (called an ecosystem), will be critical to realizing this potential. And it is a perfect timing for the Nigerian financial services sector. The Nigerian market currently has both the technological capacity and regulatory will to fully harness the potential the banking-as-a-service model has to offer for improved digital financial experiences. By applying a plug and play ideology to the development of financial solutions, virtually any business can offer embedded financial services. This could spell a new age in Nigerian financial services, as banking-as-a-service and API banking is on track to become as ubiquitous as online or mobile banking – a channel that every bank must build and maintain – the good news is all sides stand to benefit.

The Pros

The possibilities surrounding banking-as-a-service are tremendous. It promises new revenue streams, expanded customer bases, and improved experiences across a wider range of banking and financial services. For customers, the main appeal is ease of use: Banking-as-a-service makes it possible for banks to embed the products and services of third-party solution providers within their own offerings. As more companies use embedded digital financial services, consumers get more choice, thus ensuring a seamless user experience, across multiple platforms. Financial technology providers also stand to benefit from the cultural shift to the banking-as-a-service business model. By partnering with legacy financial institutions, they can offer their customers an increased range of personalized financial products and services, without having to go through the capital intensive hassle of securing a banking license. It would also save time and resources that would have been otherwise spent navigating multiple integrations and negotiating contracts. This would mean for example that providers of financial services like e-wallets and other financial services applications can bring their products to market faster, activate new revenue streams and significantly increase their margins on already established customer relationships.

For legacy players, creating a banking-as-a-service platform and allowing third-party providers to access it for a fee can inject fresh revenue into legacy institutions. Developing a banking-as-a-service platform also allows legacy banks to establish relationships and forge partnerships with emerging fintechs — thereby keeping themselves ahead of the trends that will inevitably follow once banking-as-a-service and open banking become ubiquitous. This is the idea behind the Vulte Platform by Polaris Bank, which provides the underlying infrastructure that allows Fintechs and innovators to deliver the best user experience for next generation bank customers. Doing so enables legacy institutions cooperate with promising fintechs rather than being in direct competition. This ensures both market share and mindshare. Legacy players also stand to benefit from the huge millennial customer bases that are currently the customers of financial technology providers.  By providing banking-as-a-service to third parties, legacy financial institutions can reach these new customer bases without having to pay a premium on operational costs.

Strategic collaboration will be key to harnessing potential of BaaS modelTo offer banking-as-a-service, legacy institutions must undergo digital transformations and embrace the reality of increased synergy with financial technology providers, because all sides stand to benefit from enhanced digital consumer experiences. This trend is already gathering steam with the collaboration between Google and several financial institutions in the US. Google Pay recently launched its Plex bank accounts in partnership with 11 banks and credit unions in the United States. The service will give users a chance to open digital bank accounts with legacy, trusted financial institutions and also enjoy some personalized personal finance management functions like spending insights. Banks need to take the initiative in embracing innovation and collaborate with other industry players to unlock the power of their respective ecosystems, deepen their existing relationships and design ways to serve a new generation of customers, or risk being left behind.