Banking as a Service (BaaS), where licensed banks integrate digital banking services directly into the products of other non-bank businesses, is opening consumers up to more options and putting more power into their hands.
This is challenging the industry to keep up with the fast pace of innovation driven by consumers’ unique preferences, circumstances and demand for better cash flow and convenience.
BaaS works directly with banks, financial technology (fintech) startups and enterprises to advance the outdated technology and code tangled in a patchwork of fixes by providing API software that connects all parties.
A recent report from IT research firm Gartner predicts 30% banks with more than $1 billion in assets will launch BaaS offerings within two years as part of a digital transformation that will also leverage chatbots, public cloud for banking, and social messaging payments apps.
Chris Dean, CEO of Treasury Prime, says fintechs and banks are craving new ways to reach customers, gather deposits, and open revenue streams.
“Banks provide a safe service in heavily regulated space, and fintechs can unearth new ways to innovate,” he explains. “A multi-bank BaaS system can create a network effect — banks on one end, and FinTech on another, BaaS in the center of what is essentially a marketplace.”
He says this setup helps to spark innovation, new product offerings, and partnerships in a responsible way, while meeting both regulatory and business needs.
Dean explains the network effect starts to gain momentum once you have a critical mass of entities plugged in using it from all different sides.
“It becomes a fertile breeding ground for innovation, enabling banks to be more profitable and businesses nimbler, while providing convenience to the consumer,” he says.
BaaS Helps Expand Financial Sector
BaaS is also dramatically expanding the financial sector, allowing businesses in a wide variety of industries to meet their customers where they are with embedded banking and payment solutions that fuel deeper engagement, value, and loyalty.
This is bringing more diverse competition into the sector and leading to increased complexity related to security and compliance to ensure companies are protecting their customers.
Amit Parikh, Green Dot’s executive vice president of banking platform services, explains BaaS is enabling consumers and businesses to move their money in a contextual experience, offering them more convenience and better visibility into their cashflow.
“Consumers and businesses might now have 10, 20, or more apps, platforms, or accounts for managing their money and it’s easier than ever for them to switch if they’re not getting the experience they want,” he says.
He points out the end user’s experience with their money and cashflow is now their priority and it’s about providing them the right tool at the right moment.
Dean says that expanded access to banking through this new wave of BaaS technology brings financial services to a larger community of business owners, who can now create a payments ecosystem on their platform to reduce payment friction, create new revenue streams, and increase product stickiness and customer loyalty.
“For the consumer, banking options increase and it becomes much easier to conduct transactions, send and receive payments, and earn more savings and rewards from the businesses that they patronize,” he adds. “It will also make it easier for them to launch businesses, and access capital, including in underserved markets.”
Chatbots Boost CX Experience
“Creating a great customer experience is about meeting customers on their terms and chatbots are just one piece of an increasingly expansive ecosystem of technologies that are improving this customer experience,” Parikh says.
Beyond 24/7 support and efficient and personalized customer service, chatbots offer customers the convenience of allowing them to multitask and freeing them from hold times on the phone.
“For businesses, major reductions in operational costs and faster resolution of customer service issues via chatbot can be incredibly valuable,” Parikh notes.
Public Cloud Adoption Brings Risks, Benefits
Parikh says adopting the public cloud is a transformative experience enterprise-wide, not just for the IT team, as the cloud is an enabler and accelerator that speeds time to market, drives innovation, amplifies collaboration, and more.
“These benefits of the cloud have been well-known for years, but particularly in financial services where banks are responsible for maintaining the security of so much sensitive data and the safety of critical systems, the potential risks historically slowed the rate of adoption,” he says.
However, public clouds have progressed so much at this point that the benefits now far outweigh the risks, though it’s still critical that companies do due diligence when vetting cloud partners to ensure the safety, security, and uptime of their systems.
“The cost savings gained via the cloud can also be reinvested into strengthening security, risk management and more enterprise wide,” Parikh says.
Dean adds it is common now for US banks to use the public cloud, a move pioneered by Capital One, which migrated all of its data centers to Amazon Web Services in November 2020 — many other banks have followed suit.
“This is actually part of the reason there’s been a fintech revolution, because companies no longer have to operate in their own private banking data centers, which are much more labor and capital intensive to build and scale,” he says. “If you can run data processes in the cloud, it becomes much easier for the bank to expand capacity.”
Social Messaging Makes Payments Easier
Dean explains payments have yet to gain a real foothold on social platforms like Twitter or Facebook in the US, but new products that are being made by Apple and other companies are going to significantly change how the end consumer deals with payments.
“They’ll be able to create bank accounts on these platforms and bypass credit cards at the point of purchase,” he says.
He points to Apple Cash, which allows users to pay another person in the messaging app of any iOS device.
“It’s like a digital bank account that you can add money to, and store money in when you receive funds from someone, similar to Venmo,” he says. “You pay each other directly, account to account, and when you go to the store, you can use your phone to pay for goods and services from your Apple Cash account.”
He says if this type of account-to-account payment method becomes prevalent, then businesses can bypass the card networks and the fees altogether — Chinese consumers are already tapping into this option through apps like WeChat.
“We’re seeing consumer appetite grow for more seamless means of moving money via social and messaging platforms because consumers are social creatures who want financial services to be frictionless and fit into the flow of their daily lives,” Parikh adds.
He agrees an experience like moving money in a text thread via Apple Cash is a perfect example of truly integrated financial services.
“Consumers will continue demanding these experiences expand further and further into every channel, app, and more they use on a daily basis,” he says.