By Frances Coppola
The digital age has been radically transforming the world of banking for some time. Traditional banking services are declining, as customers find online and mobile banking more convenient for everyday services such as business payments. Mobile banking apps are proliferating, providing consumers and businesspeople with ever more creative ways of managing their money. Comparison sites help people to choose the banking services that give them the best value. People and businesses use multiple applications from a variety of providers, many of them new fintech companies, to save, borrow, lend and transact.
Now, this new way of banking is emerging. Built on the digital platforms being established by fintech companies all over the world—and by banks themselves—banking as a service could fundamentally change the relationship between banks and their customers.1 But what is banking as a service, and how can it benefit SMEs?
The emergence of banking as a service stems from widespread adoption of application programming interface (API) technology.
APIs have been around for decades but, in the past, their application in banking was limited. For example, vendors of third-party financial software would provide APIs so that their customer banks could adapt the software to meet individual business needs. More recently, the open source movement has encouraged software vendors to make APIs available to anyone who wants to use them. Increasingly, rather than software vendors actively selling their products to customers, they simply make their products available to all comers via APIs. Buyers can “plug in” to the software and pay for the use they make of it, rather than buying the software itself. This is known as software as a Service (SaaS).2 Similar “plug and play” agreements occur in digital infrastructure (infrastructure as a service) and digital platform provision (platform as a service).3
Now, “plug and play” is coming to banking applications. Banks, including new digital banks, are providing API access to their financial services. Businesses, including SMEs, can pick and mix from a range of financial products to build new products and services tailor-made to their needs and those of their customers, effectively creating financial platforms from which to offer banking services of their own. This is “banking as a service” (BaaS).4
Open banking enables customers of banks to access and share financial data held by banks. API applications can access, aggregate and compare data from banks that have adopted common open banking standards.5 Comparison sites built on top of open banking networks can help customers to compare products offered by financial institutions and choose those that best meet their needs. Customers can more easily transfer funds and accounts from one financial institution to another.6
However, open banking only offers access to data. In contrast, banking as a service offers customers access to services. For example, open banking can provide a customer with information on the features of transaction accounts from different banks, but she still has to transact directly with the bank of her choice. A BaaS application, however, can give a customer access to the transaction services provided by a regulated bank even though he is not a customer of the bank.
Open banking can enable businesses to manage information across multiple bank accounts and cards and help them identify products that best meet their needs. BaaS goes further, enabling businesses to select products from a wide range of providers without having to manage relationships with all those providers themselves. BaaS can also give businesses access to fast, secure payments and other services available through regulated banks even if they don’t have accounts with those banks.7
For some businesses, the combination of open banking and banking as a service could create an opportunity for them to provide tailored services to their customers using “white label” financial products.8
White label9 financial products have been around for quite a while. For example, one major British retailer provides savings products and credit cards. The products are marketed under the retailer’s name, but they are actually provided by a large British bank. A customer who signs up for a savings account with the retailer is in reality placing their savings with the bank. However, for the retailer to provide these services, it has had to enter into a joint venture with the bank.10 SMEs might find such a relationship undesirable or even impossible.
With banking as a service, SMEs can use APIs to help them meet customers’ needs. By “plugging in” to a regulated bank’s services, a business can provide products such as transaction accounts and debit cards for customers without having to have a banking license itself or enter into a joint venture with a large bank. In effect, the business employs services provided by the bank to enhance its own customers’ experience.
In the past, banks have tried to provide a one-stop shop for their customers, offering them a range of products in the hope that customers will bank only with them. Customers, too, have often tended to stick with a single bank, because dealing with multiple providers is complex and time-consuming. But the emergence of banking-as-a-service offers businesses the opportunity to build their own tailored suite of financial products from multiple providers, “plugging in” to a regulated bank’s services either directly via APIs or through digital BaaS providers. This seems to be one more way in which banks’ traditional business models are being disrupted—to the potential benefit of customers.
With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Banking as a Service – the Next Evolution of Real-Time Digital Banking Experiences,” Capital One; https://medium.com/capital-one-tech/banking-as-a-service-the-next-evolution-of-real-time-digital-banking-experiences-b9dc069f685b
2. “Software as a service,” Tech Target; https://searchcloudcomputing.techtarget.com/definition/Software-as-a-Service
4. “Banking as a Service and White Label Banking: when what’s important is not the bank,” BBVA; https://bbvaopen4u.com/en/actualidad/banking-service-and-white-label-banking-when-whats-important-not-bank
5. “US is way behind the curve on open banking,” American Banker; https://www.americanbanker.com/opinion/us-way-behind-the-curve-on-open-banking
6. “Open Banking,” Investopedia; https://www.investopedia.com/terms/o/open-banking.asp
7. “Starling Bank Unveils Banking-as-a-Platform APIs,” Bankingtech;https://www.bankingtech.com/2018/08/starling-bank-unveils-banking-as-a-platform-apis/
8. “Starling Bank expands white label banking services,” Fintech Futures; https://www.bankingtech.com/2018/10/starling-bank-expands-white-label-banking-services/
9. “White Label product definition,” Investopedia; https://www.investopedia.com/terms/w/white-label-product.asp
10. “Our History,” M&S Bank; https://bank.marksandspencer.com/explore/about-us/history/