To gain a competitive edge, banks first looked to fintech companies to provide more innovative financial services. This partnership gave financial institutions the sophisticated tools they needed to leverage the cloud and create a frictionless customer experience.
Now fintechs are starting to acquire their own banking licenses. Combined, these mergers have created the environment that allows for Banking as a Service to blossom, helping traditional banks evolve even further.
The growing popularity of X as a Service
Full-scale Software as a Service is a relatively recent advancement in the IT sector, as digital storage options have become cheaper and more affordable for large companies like Amazon, Microsoft and Apple. With the robust and secure hosting capabilities offered by these tech giants, businesses in every industry began hosting their platforms and programs on the cloud, eliminating the need for in-house servers and providing instantaneous upgrades.
This development has given rise to X as a Service (XaaS), as cloud computing makes IT more cost-effective, easily integrated and more widely available to everyone. While the most common manifestations of this phenomenon include Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Data as a Service (DaaS), Banking as a Service (BaaS) has become a driving force in digitalization of the financial sector.
BaaS unbundles the financial sector
Seeking to leverage the digital innovation available through cloud services, innovative firms and institutions have created BaaS solutions. Different mobile/internet disruptors are contributing to an "unbundling" of financial services through specialized fintech companies. This creates many more options for banks to utilize a variety of agile product solutions and updated pricing models to enhance business value.
By stitching together an architecture of plug-and-play apps, BaaS creates a frictionless user experience. Customers are flocking to frictionless banks that have partnered with fintechs to provide seamless and secure transactions, Business World reported. If people have to grab a debit or credit card from their wallet to make a purchase, it already feels like too much of an effort. Giving customers the ability to take advantage of banking options from their smartphone or PC makes them more likely to use the services.
In addition, while banks increasingly morph into tech companies, fintechs are stepping into banking. While current U.S. regulations play catch-up with the the rapid speed of fintech innovation, European institutions are trailblazing new BaaS options. Across the pond, the U.K. is testing out a "regulatory sandbox" to experiment with fintech products in a live environment, according to Politico.
Meanwhile, German regulators granted a special banking license to solarisBank, formed by FinLeap, a fintech startup incubator, reported American Banker. The granting of the license will now allow solarisBank to provide account and transaction services, compliance and trust solutions, working capital financing and online loans to other fintech companies.
What makes a bank frictionless?
Although U.S. regulations might be a bit behind the curve on this matter, there are still ample options for banks to take advantage of these unbundled packages. Gartner made some insightful recommendations for bank CIOs in its 2016 publication, "Digital Innovation in Banks: IT Infrastructure Modernization Accelerates Progress."
First, review the options for partnering with non-financial firms to deliver sophisticated customer engagement expertise. This includes tech companies and data analytics firms.
Next, work with digital banking providers on implementing open architecture software that "supports traditional and mobile browsers, as well as native hybrid technologies."
Of particular note was the recommendation for banks to "update their delivery architecture to separate customer-facing presentation from bank transactions and to support delivery of functionality to any device or browser." This factor will be crucial for operating a frictionless financial firm that truly provides seamless and innovative services.