Banking as a platform is becoming a hot topic, but what exactly does it mean? BaaP refers to a model where a bank integrates fintech services and offers them to its own customers. In practice, it is the opposite of Banking as a Service (BaaS). Banking as a Platform enables a bank to adopt a fintech approach and accelerate the delivery of products and services that increase customer engagement and loyalty. This blog explores its benefits and why now is the time to act.
Technology is a transformative part of banks’ success, and COVID has accelerated the need for change across the banking industry – cutting-edge technology is shaping an entirely new and improved customer experience (CX) and redefining the way banks earn their money. Innovative business models that use advanced technologies are rapidly evolving, reflecting a banking landscape that is becoming increasingly open and collaborative. As a result, Banking as a Platform (BaaP) appears to be a compelling option, which quickly moved from theory to practice.
What is Banking as a Platform (BaaP)?
Legacy banks with legacy technology stacks recognize the need to digitize to stay competitive. Banks know they need to take a fintech approach, and BaaP can accelerate that progress. But there is often confusion about what BaaP means and how it works.
Basically, BaaP refers to banks integrating fintech services to augment their own offerings. In this model, the bank “owns” the customer relationship and keeps the customer in its own ecosystem; fintech owns the platform behind the scenes and orchestrates the potentially wide range of business arrangements possible for the ecosystem.
One of the main attractions of BaaP is that it allows banks to jump-start innovation. Many incumbent banks welcome this approach – perhaps because they know that technology is not one of their core strengths, or because they realize that their in-house technology expertise has become stale and exceeded.
BaaP can provide significant benefits to banks, fintechs and customers. For example:
- Banks are freed from the worries and risks of technology management and the need for speculative technology investments
- Fintechs have a ready market for their product and – with the right approach – are assured of repeat business
- Customers benefit from a constant flow of service innovations based on modern and intuitive technology
BaaP – Why now?
The move to a bank-as-a-platform model represents a major shift in the mindset of incumbent banks, many of which have been designing, building and/or managing their own technology for decades. However, now is the time for banks to consider BaaP as a way forward.
Reasons for switching to BaaP include:
- Open bank. Around the world, open banking legislation dictates that banks become more open and collaborative. In several major markets, participation in open banking is mandatory, so banks need to abandon their “vault” mentality. Over time, open banking will force banks to move towards a more open and horizontal architecture that facilitates collaboration. The bank has become an ecosystem business and BaaP provides an ideal foundation for collaboration using application program interfaces (APIs).
- Technology. Although APIs have been around for decades, they have recently become mainstream as a primary driver of innovation and growth. Companies like Uber owe their very existence to APIs, and modern developers everywhere are using APIs to build better software, faster. The benefits of APIs are evident in almost every industry and are a building block of open banking and BaaP. At a simple level, they allow disparate systems to be integrated on a single platform and choreographed in real time.
- Customers. Technology has dramatically increased customer expectations. In the age of ‘mass customization’, customers expect financial services that meet their exact needs. With BaaP, banks can focus on their product and service innovations, while leveraging the expertise, functionality, infrastructure and scale of a technology partner. The bank can offer more new products to more customers and geographies, all with speed and agility; this ultimately increases customer engagement and loyalty.
- Multiple stakeholders. While the need to keep customers happy is obvious, banking in an ecosystem creates a new set of stakeholders, each playing a critical role in delivering seamless customer journeys. Banks must balance the needs of multiple stakeholders and manage an ever-changing ecosystem. A platform approach helps ensure that all participants operate in harmony.
Banks must embrace innovation and transform for a future that will be defined by change. BaaP has come of age and heralds a new era in banking, an era defined by both collaboration and competition.
In my next blog, we will explore Banking as a Service (BaaS) to better understand how the BaaP and BaaS models differ and what unites them.