BaaS - Banking as a Service

BaaS allows third parties to tap into existing banking systems through application development interfaces (APIs) that allow communication between banks’ software and the third parties’. These open APIs expose the banks’ functionalities to anyone intending to access them, which includes 

• Independent developers, 
• Fintechs, 
• Non-financial institutions like restaurants and welfare clubs; enabling them to build their own features on top of the banks’.  

On the other hand, the Banking as a Service relationship does not always work one way, banks can also tap into the unique capabilities of fintechs. For example, remittance company TransferWise’s tech works not by sending money from one country to the next but by rerouting money from a bank account within the receipt’s country so that it doesn’t have to cross the border. This makes its international money transfer service cheaper, UK’s Monzo bank partnered with TransferWise to integrate the service into its banking app.

Furthermore, as open banking becomes industry standard, you should be able to plug and play different financial capabilities like lego pieces to birth a new service without ever having to own the infrastructure behind it. For example, to cook up a PayPal-like service, you’d just plug in mobile wallet capabilities, sprinkle in a little electronic virtual card functionality and season it with Peer to peer cross-border transfer features, ideally, BaaS should make it that easy to cook up a PayPal

IMPACT OF PSD2 ON BANKING AS A SERVICE

The European Union set 14th September 2019 as the deadline for financial companies to comply with the Payment Service Directive II (PSD2); which forces banks with online accounts to provide access to their customers’ account information to registered third parties. However, the account holder has to give consent first.

Additionally under the PSD2, a fintech company (third-party provider) can be licensed as an  

• Account Information Service Provider (AISP); who is permitted to access and consolidate account information from a user’s different banks accounts, or/and 
• as a Payments Initiation Service Provider (PISP): who can initiate a payment request from a user’s bank account at their request. 

This broadens the range of services they can create out of the access they receive.

HOW DOES THIS AFFECT BANKING? 

Well, just imagine your favourite bank being forced to avail information to a company that can use it to launch a competing product. A great example of such a product is Mint, a financial planning an app where you can read all your information (and make payments) from different bank accounts instead of going into each bank individually. Such a service reduces the amount of contact between banks and their customers.

According to a research/survey, banks risk losing 25-40% of their income from the disruption. Additionally, banks that previously invested little in IT infrastructure will have to ramp up their budget to avail the open APIs needed to provide customer information to third parties. 

One way for banks to tackle the revenue drop will be to embrace BaaS and avail more of their capabilities to third parties under revenue-sharing deals. In such a circumstance, PSD2 will eventually become an accelerator of Banking as a Service making it a necessity rather than an option.