Banking-as-a-Service (BaaS), a model where banks publish
APIs to allow third-parties to access their services and data securely, is a
key enabler of open banking and embedded finance. With the majority of banks
showing interest, the BaaS market, is expected to grow multi-fold in the next
This growth seems like a given because as a secondary
service underlying almost every transaction, banking naturally lends itself to
Another factor supporting the growth of BaaS is that
embedded finance, which it is part of, enjoys the favour of all parties:
customers, because they get a banking experience that is seamless with their
primary transaction such as buying a phone or vacation package; merchants,
because they can acquire new customers and revenues with options like buy now,
pay later (BNPL); and banks, because they can grow their business by embedding
their offerings within the consumption journeys of other brands.
As the technology partner to financial institutions around
the world, a question we are frequently asked is how to successfully launch,
scale, and differentiate a Banking as a Service proposition. What we tell our clients is that the
important thing is realizing that BaaS is an evolutionary journey, rather than
a “one and done” exercise.
Let me explain:
Based on our experience, we believe that incumbent banks should
launch their BaaS journeys in partnership with a select set of fintech
companies, neobanks, or digital giants that are already active in this space.
At first, the goal should be to introduce basic services,
such as checking accounts, debit card payments, and unsecured lending, through
these partners to build a foundation for API banking as briefly described
The starting point is to develop the APIs for the
shortlisted use cases. As far as possible, banks should standardize their APIs
in alignment with their partners’ requirements, so it becomes easier to work
with, and also add, partners in the future.
Good discipline, by way of robust documentation and
adherence to product management principles, accelerates API maturity.
There needs to be a strong focus on performance, because
even a slender technical failure rate impacts experience disproportionately. As
an illustration, consider a digital payment that doesn’t go through instantly.
Even though this happens very rarely, both payer and receiver are anxious until
the transaction is completed.
A dedicated API banking team is required to support the
bank’s partners in innovating further use cases. In fact, the most progressive
banks even have API sales teams for business development.
Finally, a modern core banking platform – with RESTful APIs,
and event architecture – is a big asset, since it enables the bank to set up
its BaaS proposition quickly, at low cost and effort. In contrast, while a bank
running on legacy technology can also create APIs, it will have to spend a lot
more effort to do.
Banks with an adequate API foundation should then scale
their BaaS offering on both demand-side and supply-side ecosystems. On the
demand side, this involves expanding the number and types of partners to
include – in addition to fintech and digital giants – ERP software, TMS
providers, human resource management solutions, etc.
Accordingly, a bank which allied with a limited number of
high impact partners at launch, will scale by working with large, and also
niche, players. Importantly, it will have already standardised and exposed the
relevant APIs and webhooks for the use cases being explored with each of these
Basically, the bank, which used the launch stage to learn
from its biggest partners, will now leverage its new partnerships to scale the
business. This is what India’s ICICI Bank is doing by working with more than
100 partners just for building SME banking use cases.
Equally, banks need to develop the supply-side ecosystem,
particularly because their clients may want services other than what they (the
bank) provide. Sometimes these services may be something the banks use
internally, such as the taxation database or SME registry in the country of
operation, access to which they could offer to clients via APIs for a fee. The
addition of adjacent capabilities like these will make banks’ API channels more
attractive to customers. Some progressive banks are going further to offer even
competing services through their channels.
That being said, the vast majority of banks are still in the
early stages of launching a BaaS offering. Nonetheless, they should start
thinking about a roadmap for scaling, and following that, differentiating,
Although BaaS is currently in a hype cycle, it is likely to
start maturing shortly. However, it will not eclipse the other channels anytime
soon. In that case, a BaaS offering’s differentiation will depend on the
breadth and depth of its (bank’s) APIs and webhooks, and ease of partner
Today, even the most advanced banks take six to eight months
to onboard a partner, instead of the ideal two weeks. There is also a need to
standardise and streamline information security requirements, so partners don’t
spend excessive time and effort in conforming to those expectations. While they
are not there yet, it is expected that the progressive banks will achieve these
goals in the near future.
For differentiation in the long-term, they will need to
exert further to exploit two things, namely the network effect and the learning
effect. The first is an outcome of broader supply-side and demand-side
ecosystems; the more numerous the supply-side participants in a marketplace,
the more valuable it is to the customers in the demand-side ecosystem, who are
able to meet multiple needs through a single partnership (and way of working).
Basically, the bank differentiates its BaaS offering by expanding its services
to include a variety of adjacent non-banking services such as wealth management
The learning effect comes into play when banks expand their
supply-side networks and leverage the deeper understanding of partner needs to
curate services more effectively. For instance, a bank working with several HR
management systems may find that payroll processing APIs should be curated
differently than general payment processing APIs. Since the learning effect
depends on a bank’s unique ability to use insights, it can set a bank
distinctly apart from the competition.
But all of that is still in the future. Banks, which are
expressing keen interest in the BaaS model, must implement and scale it with
alacrity. Customers want it, merchants are asking for it, and if the incumbent
banks don’t respond, there are plenty of next-gen players who will be more than
happy to provide it.
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