Will banks be ditched in the future?

June 21, 2017

Disruption, disruption, disruption. In today’s increasingly uncertain world, technology is challenging status quos all over the world. Long gone are days where only large companies own the market monopoly – industrial incumbents must look over their shoulders to watch out for up and coming start-ups that are attempting to disrupt the scene or risk becoming irrelevant.

The banking industry is no different.

The rise of fintech has put immense pressure on traditional banks to relook their strategy as customers flock towards alternative payment methods such as AliPay, WeChat, or UK’s first digital–only “challenger” bank, Atom. As Bill Gates aptly summarised it, “banking is necessary, banks are not” – today’s modern customers are no longer looking for a bank, rather, what they need are banking services.

As traditional banks race to maintain their market leadership, we are starting to see a monumental shift as financial institutions explore the concept of Banking as a Service.

What is Banking-as-a-Service?

Banking-as-a-Service (BaaS) is an end-to-end process that aims at creating a comprehensive financial services ecosystem through the seamless integration of as many service providers.

According to “Digital Bank” author Chris Skinner, the bank acts as the infrastructural anchor, providing the necessary licenses and regulatory compliance. In the middle layer, it is where banks provide the service mechanism for other providers. Finally, the top layer illustrates the ecosystem of start-ups that provide the various financial services that we need. With this concept, it allows non-banks to effectively introduce financial products and expand into new markets.

Figure 1: Layers of BaaS platform, source: Life.SREDA

This begs the question: why would banks want to enable fintech start-ups to provide banking services at a lower cost? Would that not erode the bank’s profits? The value of this concept comes from increasing the loyalty and profitability of the banks’ customer base. Instead of losing customers to the numerous alternatives, banks can form partnerships with these start-ups and integrate the third-party services into the bank’s existing digital channels.

The bank’s customers can access these value-adding services through the bank itself. This in turn allows them to provide a better experience for existing customers, as well as acquiring new customers and revenue streams. In addition, integrating third party services can allow the bank to reap significant cost savings because they need not buy new digital banking technologies individually to keep up with the advent of fintech. In addition, integration is relatively quick to implement to the bank’s existing core infrastructure.

Non-banks benefit from these arrangements as well. Instead of struggling with complicated banking regulations, non-banks can simply partner with an existing bank to quickly launch their products and services. From a start-up’s point of view, this is incredible as they can concentrate on their core business, instead of navigating through the intricate legal requirements.

We could even see non-financial companies like telcos or Internet companies providing increased value to their customers through financial services like e-payments. Therefore, BaaS is a win-win-win situation for customers, other financial services providers and the bank.

Making This into A Reality with Application Programming Interfaces (APIs)

To turn this concept into reality, we need something called the application programming interface (API). An API is a set of routines, protocols, and tools for building software applications. It allows the creation of applications which access the features or data of another operating system, application or service. It acts as a messenger that delivers your request to the provider that you are requesting it from and then delivers the response back to you.

Sounds complicated?

Imagine this: Think of an API as a waiter in a restaurant. You decide to order a plate of classic Fish & Chips and a pint of ice cold beer to go along. The kitchen is the provider who will prepare your mouth-watering meal. The waiter (or API) is the one that communicates your order (request) to the kitchen (provider) and then delivers the food (response) back to you. If you are a more visual learner, check out this video!

An excellent example of BaaS is Fidor Bank, an online bank in Germany. Fidor provides a white label cloud banking solution through APIs. It provides public APIs that can be used modularly. This enables clients to rapidly connect to the bank’s cloud system called fidorOS. The image below illustrates some of the APIs available.  As such, non-banks can make use of the bank’s platform to deliver banking services. For example, Telefónica Germany will be partnering Fidor Bank to launch its mobile banking offering called O2 Banking with the help of these APIs. This will give O2 mobile contract customers access to banking services like transferring money via their mobile number.

Fidor Bank is just one example. Several banks in the western world have already made their move in this area. APIs and partnerships will hold the key to ushering in a new era of connectivity. Banks will function not quite as the centre of the universe, but rather as an invisible force integrating networks together, providing a service to aid customers on every step of their journey.

For us, we can’t wait to see the developments and changes that BaaS and APIs will bring in the new future of banking.

#API  #TeamHAPI

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