Cards and Payments

Key assets banks own today is banking license, customer data and trust.  Although Fintechs are great in developing customer facing innovative products, they simply can't compete with the moat banks hold on regulatory and trust factors.

Regulations like Open Banking and PSD2 are democratizing the data owned by Banks - based on customer choice banks are now mandated to share customer data with Third Party Service providers. Banks and Fintechs are realizing that they are better placed in playing their strengths by collaborating rather than competing. Banks can now monetize their valuable customer data and core services through APIs with Fintechs and then Fintechs can build innovative solutions on top of these banking platforms.     

In the world of Everything as a Service we are seeing Banking as a Service (BaaS) getting accelerated adoption. Both big and small banks, legacy and neo banks are investing heavily building their BaaS Platforms and collaborating with FinTechs and other Technology Providers. We see Australian banking giant Westpac partnering with 'Buy now, Pay later' provider Afterpay to provide banking services in BaaS model. Similarly, in US, Wells Fargo has built Wells Fargo Gateway, a BaaS platform providing services like payments and foreign exchange for their partners.

Banks are preparing for BaaS future:

Banks are defining the key regulatory policies, the customer journey, the shared utility model and the marketplace ecosystem. They are decoupling their legacy applications into portable and flexible services and building API Management capabilities. They are strengthening their cyber security and risk management capabilities as well. In their Cloud native architecture, they are focusing on building redundancies and resiliency to avoid systemwide failures. Banks are also betting on their Analytics capabilities to monetize the BaaS data for targeted marketing/offerings.

Banks are also defining the KPIs which will help assessing the program success. Some of the KPIs are:

1. Time to Market to launch New Product / Service
2. Percentage of Market Share / Total volume of accounts ~ Revenue Earnings
3. Cost to acquire a digital customer (retail / corporate)
4. Number of Transaction (executed) per second
5. Time taken to address & resolve customer issues ~ Customer Satisfaction
6. Expanding Customers reach to other products (i.e. offering additional products)

Key Customers for BaaS Services:

We broadly see BaaS customers in following big categories:

1. Challenger banks and small community banks: They need backend banking services as a commodity.
2. FinTechs: They would need specific banking service to augment their business offering. i.e. payment service. There will also be certain FinTechs that will consume customer data to augment their service offerings.
3. Credit Unions, NBFC and Insurance companies: P2P Lending, microlending and insurance companies will need BaaS services for reducing cost of operations and improve margin.
4. Corporates and SMEs requiring easy integration with their internal systems: Partner APIs integrating with internal accounting systems etc.
5. Marketplaces and gig-economy platforms: These will partner with banks for their Core Data and White-label banking services.
6. Banks having valuable customer data and banking permit will offer Data and Regulation as a Service offerings.
7. Consortiums (i.e. trade, fraud, etc.) of Tier 1 Banks, SMEs and New Financial Institutions.

Greatest potential for Banks in BaaS model is to become Financial Supermarkets:

We could see Banks becoming Financial Supermarkets offering new services in a mashed ecosystem of Customers and Partners. From the acquired intelligence of transactions and its own customer data, banks will now be able to suggest personalized new businesses where they see unmet demand. For example, based on the data acquired from its BaaS partnership with a payments fintech, banks will be able to predict a surge in demand for Insurance products and advise its Insurance clients the specific demographics where they can invest for growing their business. Beyond improving the growth and return ratios for banks, this Supermarket model of banking provides the highest potential for improving the society at a large. Exciting journey of BaaS has just started, and we think BaaS has huge potential in transforming the financial services landscape.