Where does BaaS go from here: the future of Banking-as-a-Service in the UK
By Marouane Bakhtar, Managing Director UK, Synpulse
The UK is a longstanding player in the banking market, offering financial services an attractive sandbox for new startups and technology.
Over the past decade, FinTechs have been an attractive target for investors, and although purse strings have tightened with respect to funding, the interest has not diminished. According to a CBI Insights report, Banking-as-a-Service (or BaaS) startups have become an attractive target for acquisitions and have driven up the M&A in this sector. Specialised PE and VC firms, along with major legacy banking brands have continued to show interest in the sector.
Even though all indicators say that BaaS is here to stay for large financial service institutions, and will continue to attract investment, it remains to be seen how this burgeoning sector will establish itself in the traditional banking market of the UK.
Tracing the timeline of the UK’s digital banking sector
Much before the word ‘digitalisation’ entered our vocabulary, banking underwent individual development where systems were developed internally at banks and operated on mainframe computers.
From the 1960s to 1980s, banks were responsible for building their own core banking systems to service their basic functions and process transactions. It was in the 1980s, that the demands of modern banking ushered in standard software and attention was given to security, and the speed at which data was processed increased.
Digitalisation revolutionised the banking world. From the period of 1980s to 1990s, banks moved away from in-house developments and instead implemented commercial solutions that proved far more efficient. This helped them become more customer-oriented, as they were now more agile, and evolved to meet developing demands and create customer-centric systems. Undeniably, this has created the banking ecosystem we now know today, riddled with complex regulatory and security concerns.
Before there was Banking-as-a-Service, there was Software-as-a-Service – the 2000s brought with them the internet and introduced software and digitalisation to banking.
This helped the banking sector take strides in the array of financial solutions they could offer to clients, as innovative, new products could be developed quickly and efficiently. The banking infrastructure moved from using on-premises resources like data centres and hard drives, to using cloud-based storage. This massively increased storage capabilities and processing power, which equipped them with newfound agility when adapting to customer demands.
To understand how the banking sector could be disrupted by a new digital-first and ecosystem-centric approach, let’s look at another industry that followed a similar trajectory – hospitality and the rise of Airbnb. What started as a small, informal community with niche users, blossomed into a professional platform allowing home-stays to become a formalised market, offering the right and best in class tools to its users. New industries mushroomed around this, specialising in Airbnb lettings and Airbnb management, and soon, it was its own ecosystem.
Similarly in the banking world, a new ecosystem awaits. With Banking-as-a-Service and Platform-as-a-Service as a locus, the banking ecosystem is set to be dominated by platforms that shape its future. The reason for this is a customer-centric approach.
Platforms offer customers the simplicity, and choice of products, and tech-driven features that fit seamlessly into their lives. Since banks look very different now than they did two decades ago, banking services must catch up too. Customer information exchange between systems that use secure standards of data-sharing make it easier for platforms to host different bank accounts from multiple banks on one platform – making these platforms the centrefold for the future of banking.
How Baas is reorganising the banking sector
Banking-as-a-service uses APIs (Application Programming Interfaces) to integrate third party systems with financial services, allowing these systems to embed their banking services within the existing products and offerings of legacy FS providers.
In doing this, banks are equipped with the latest technology to differentiate themselves and maintain customer loyalty. For customers who are technology natives, like Gen Z-ers, and benefit greatly from an innovative and intuitive banking experience as they open their first bank accounts, technology is crucial. This helps banks in maintaining customer loyalty too. In a world where, customers are plagued by rising interest rates and slowing economic growth, customer retention is a vital currency for long term stability.
There are other benefits to the BaaS model. It is able to integrate new models quicker, and using its prefabricated modules and APIs, can continuously evolve its financial service offering in line with customer needs, ultimately freeing up resources to focus on core strategy and long-term planning.
Baas solutions also help give brands insight into improving products via reporting APIs. Detailed information on how customers use their services unlocks a deeper understanding of industry trends, for example saving and spending behaviour, for brands. This helps improve the overall customer experience and deliver more targeted products.
From an operational standpoint, the BaaS models help manage data centrally, making the need for programming to customise solutions redundant. This is a much more efficient data management solution, as existing solutions are already customisable. The key is to put the data to work.
Phasing out competition in favour of integration
The digitalisation wave brought with it a shift in the power centre of the banking ecosystem – not unlike the disruption that Airbnb caused for the hospitality industry.
As startups, fintechs, and alternative lending models compete with legacy banks, the pressure to remain ahead of the curve has created innovation and competition in equal measure. But both customers and businesses are moving towards a platform-based ecosystem, that requires incumbents and new entrants to work together be able to integrate and share their data.
It is only when all the moving parts within the ecosystem, from banks, fintechs to asset managers, payment transaction processors, brokers, custodians, and data providers come together, that the whole ecosystem benefits from common economies of scale and standards.
Towards a symbiotic ecosystem
The movement from in-house individual development to cloud-based, specialised solutions in banking has forever changed how FS providers offer services to customers. This has brought BaaS to the forefront of the sector, and it is now necessary to keep this momentum going.
With the move towards BaaS, we are on the path to reimagine the role of banks. The banking sector is transforming rapidly, and customers expect innovation. It’s no longer enough for banks to look within to solve customer problems, as they risk being left behind.
With non-banking Big Tech players also vying for a spot in the industry, fintechs and legacy banks will have to remain porous and be open to integrate, creating a partnership that leverages each other’s strengths to provide the next generation of services. This could include expanding other digital-first offerings or specializing to serve niche industries.
Banks that harness the power of BaaS correctly will forge a path forward by leveraging their own capabilities in ingenious ways. To remain relevant, they must focus their strategies on innovating to meet the needs of tomorrow’s customers, rather than simply catching up to the consumer expectations of today.