Banking as a Service Pt. 3: Leveraging BaaS to go digital

By leveraging Banking-as-a-Service solutions, financial firms can better meet customer demands.

In previous parts of this series, we discussed whether Banking as a Service (BaaS) is the next big digital push for banks and if it will even matter who customers use as their bank. 

In the third and final entry in the series, we'll move deeper into the current digital era and show how banks need to rethink the future of service delivery to retain wallet share and remain relevant. The rise of fintech offerings means banks need to step away from building in-house financial solutions and instead assemble a range of consumer-driven financial management tools to leverage BaaS and maximize growth opportunities.

What does digitalization mean for the banking sector?

The impact of digitalization on the banking and financial sector cannot be overstated. From implementing robust automation software to the introduction of robo-advisors, banking is currently undergoing a major disruption and reconfiguration. As noted in previous installments in this series, BaaS technology provides a cost-effective and scalable route for banks and financial firms to leverage digitalization.

"APIs serve an important function in implementing a BaaS strategy."

An application program interface (API) serves as a major feature in implementing a robust BaaS strategy. APIs are the increasingly common technology protocols that allow different software components to communicate, according to Finextra.

In the past, banks would buy digital financial service software and install it onto in-house legacy systems. These programs would cost a fortune, were not easily or effectively scalable and often had clunky user interfaces. 

Instead of relying on quickly outdated one-size-fits-all solutions, BaaS, with its open APIs, creates an environment where banks can use plug-and-play apps that can substitute each particular service a bank provides. Firms can stitch together different agile product offerings aimed at serving the specific needs of its customers. 

For instance, the bank core can focus on handling deposits. This organization can then partner with a host of fintechs to handle individual banking processes. It can utilize a specific plug-and-play app for internal customer support, another for fraud monitoring and then a third for routine accounting. In addition, the bank can leverage open architecture for card issuing and mobile wallet solutions, and then work with another partner for implementing near-field communication options.

As open APIs drive the "X as a Service" model that has become so prevalent across industries, particularly banking, they will continue to add value by helping them:

  • Build out an ecosystem of fintech partners.
  • Encourage innovation.
  • Modernize legacy platforms.
  • Improve customer engagement.
  • Remain compliant with regulations.

With these features at their disposal, decision-makers will start to embrace the "banking everywhere experience" model to deliver frictionless customer journeys across a range of platforms and devices.

The banking everywhere experience

The role of open APIs in creating this frictionless BaaS environment means new market entrants now have a zero-margin model they can use to easily start a new bank with limited overhead. As these new players enter the market, established organizations will have to compete with them by creating an API ecosystem that taps into external innovation and allows customers to bank whenever and wherever they want.

The BaaS model provides banks with the flexibility to meet customers' demands, as 65 percent of consumers think its highly important for banks to have a digital presence, according to a recent EY survey. 

Without a strong digital presence that leverages BaaS technology to implement a robust strategy, banks and financial firms will be unable to expand their reach and breadth of services. This will be crucial in creating the banking everywhere experience necessary to compete and collaborate in the financial sector of the future.