Banking-as-a-Service: Common play of banks and fintech

The current state of Banking-as-a-Service (BaaS) industry.

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Read more about Banks and FinTech in the previous chapter. 

Chris Skinner predicted this trend in 2009: “you’re probably all familiar with SaaS – it’s basically paying for applications as you use them, rather than buying them.  These services used to cost you a fortune, but are now free or near enough. That’s where banking is going. Banking becomes plug and play apps you stitch together to suit your business or lifestyle. There’s no logical reason why Banking shouldn’t be delivered as SaaS.”

“What I’m really getting at here is that the old model of banking, where everything is packaged together around a deposit account with a cheque book, is bust. That’s why some banks are starting to white label and break apart their traditional services so that corporates can just buy-in the bits they like and want.”“This is the future bank, and old banks will need to reconsider their services to compete with this zero margin model.”

[su_pullquote align=”left”]By 2016, 75% of the top 50 banks in the world will open their API and 25% of these banks will have their app stores for customers. Gartner research[/su_pullquote]The traditional business models of Banks are being threatened by the small and agile fintech companies. “In next 5 years we will see a completely different kind of financial service providers, providers who are customer focused and more agile in their services and processes.Bankers for long made banking a complex process. Banks define the services and how those services will be served to the customer. Customer is at the receiving end.

The status quo is being challenged, and their monopoly on how customer should conduct business is being questioned.  In next few years, we will see banking-as-a-service model like any other service. Traditional financial house will act as a payment and accounting engines, service will be built on top of those smaller traditional banks. Anyone can build customer centric service on top of the traditional banking system. This will provide customer bank agnostic services. Services will be pay per use.

Customer will be free to pick and choose the service most suited for his needs. In any industry we look for building relationship when services are not transparent and simple enough to understand. Once a service is simplified, we aim to get things done. Building relationship is just an overhead. No one visits a bank to build relationship, customer builds relationship with the bank so that he can do business with ease. If he gets the same ease via different platform then why would he stick to the traditional banking model.

One of the best examples of BaaS is The Bancorp (75,000,000+ prepaid cards in U.S. distribution, 100+ private-label non-bank partners, including Simple, $232 billion combined annual processing volume).

“From the start, we’ve spent most of our time and efforts behind the scenes, putting the companies who work with us – and their goals – first. We’ve remained in the background, offering them the guidance, innovative thinking, and operational support they need to succeed.”

“Today we’ve grown far from our roots as a branchless commercial bank to become a true financial services leader, offering private-label banking and technology solutions to non-bank companies ranging from entrepreneurial start-ups to those on the Fortune 500.”

Another BaaS-company – Singapore-based MatchMove. MatchMove platform is available also in the Philippines, Vietnam, India, Thailand, Indonesia and Malaysia. Since December 2015 their consumers in Singapore will be able to pick up a stored-value card from convenience stores and minimarts, and use it like they would any debit or credit card. The twist? They do not need to set up a bank account, or submit their payslips to apply to use the 16-digit MasterCard. For the virtual card, its partners are MasterCard and American Express, although its partner for the physical cards is only MasterCard.

The cards are aimed at consumers who do not have bank accounts or do not qualify for a bank-issued credit card. The big draw of the stored-value cards, which will be available at over 600 locations, is security. Card users get a complimentary United States billing address, which will come in handy when shopping at websites that do not accept credit cards or PayPal accounts without a United States billing address.

The idea to start MatchMove Pay came about because Mr Naik feels that there is a huge, untapped market in Asia, which is still largely dependent on cash.

“There are trillion-dollar economies that depend almost entirely on cash”.

In October 2015 MatchMove announced it has been granted by the Monetary Authority of Singapore (MAS) a licence to carry out remittance services in the country. “With this approval from MAS, we can execute our strategy of bringing safe, affordable and instant remittance services to all mobile phone users who are [residents] in Singapore,” said Shailesh Naik, CEO and Founder, MatchMove.

The company generates revenue through a license fee from enterprise customers who use the MatchMove Pay platform, and transaction fees. The latter can come from top-ups, advertisements, subscriptions and more. Going forward, the company will be introducing “innovative but compliant and regulated services” for those who reside in Singapore.

In August 2015 India’s 5th largest private bank, YES BANK, partnered with MatchMove Pay to tap India’s burgeoning e-commerce and payments market[6]. MatchMove launched its mobile platform-as-a-service in India through YES BANK’s regulatory infrastructure. In January MatchMove Pay announced a “significant” investment round led by Japanese credit card and financial services company Credit Saison and joined by GMO Venture Partners.

“We believe that Southeast Asia will evolve into a cashless society as the growth of credit cards, prepaid cards, and smartphone payments continue to gain momentum”

“MatchMove Pay has addressed each of these three critical factors […] and is therefore uniquely positioned to quickly unlock the potential for ecommerce growth in Asia.”

Hiroshi Rinno, Credit Saison’s president and CEO, said in a statement.

“MatchMove Pay has addressed each of these three critical factors […] and is therefore uniquely positioned to quickly unlock the potential for ecommerce growth in Asia.”

In July 2013, the research company Gartner published Hype Cycle for Open Banking. Gartner describes open banking as the provision of services in the context of users through API platforms, app stores and apps. Gartner’s Hype Cycle of that time had hackathons at the peak with open-source banking systems, cloud API management and other technologies on the rise.

While banking apps and even public web APIs were “sliding into the trough”. According to Gartner, by 2016 75% of the top 50 banks in the world will open their API and 25% of these banks will have their app stores for customers.

This concept was put into practice by Open Bank Project. The UK government promotes the use of open data and open API in the banking and supports the exchange of information between financial institutions. Within the framework of the state initiative, the first private company will be able to create a service that combines customer data from different banks by April of 2015.

The initiative called Midata has been implemented in the UK for the past few years and is aimed to open access of information about themselves for the citizens from different public and private institutions, including banks.

One of key development of 2015 has been the open sourcing of bank services.

Chris Skinner wrote: “I’ve talked for a while now about ‘banking as a service‘ (BaaS) – first blog entry almost seven years ago – and this forecast that anyone in the near future would be able to build their own bank through apps, APIs and analytics. The core of this view was based on banking processes becoming open sourced through APIs, and in 2015 it’s finally happening. It hasn’t happened yet – this is an ongoing process – but it’s definitely happening and is taking place in three forms: voluntarily, customer demand and regulatory action.”
Key protagonists of open sourcing are the banks like Fidor and BBVA. Strangely, many traditional banks are averse to the idea of open sourcing the bank, as they fear it could commoditize them or disintermediate them. In fact, the fact that they’re not going open source is the most likely reason why they will be commoditized or disintermediated.

[su_pullquote]”You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest possible interest rate”[/su_pullquote]App services such as Airbnb, Uber, Facebook, TripAdvisor, Apple Pay and more are demanding simple plug-and-play code for payments to be offered by financial providers, because the payment is no longer the important part of the process. It goes further than this though, as financial data can be mined by others to create new apps and processes. Therefore, new services can be built from the financial data leveraged in those APIs.

In December 2015 counted 63 insanely useful APIs across 12 segments to supercharge your product. APIs are the infrastructure that developers use to build applications to access content and other services.

As FinTech startups continue to disrupt traditional financial services, banks are also waking up to the fact that offering an open API—where developers can latch on and create very specific customized app solutions—is the way to engage and retain their customers in the future.

Banks and other financial institutions are sharing codes through application programming interfaces of software gateways that allow applications to work together. APIs are the bank’s tool for survival and relevance in a smartphone-first world. So making it open to outsiders is pretty much like inviting the competition to come in and read the insider’s note.

However, industry watchers say that offering an open API is not a deterrent. Instead, it lets fresh-off-the-boat tech companies and ever competitive developers innovate much faster on the built platform, as opposed to keeping their app development limited to compliance-inhibited, resource-strapped IT organizations.

Philippe Gelis, CEO at KANTOX, told: “The second wave of fintech, to come in two to five years’ time, will be “marketplace banking” (or “fintech banks”). This will be a type of bank based on five simple elements”:

1. A core banking platform built from scratch;

2. An API layer to connect to third parties;

3. A compliance/KYC infrastructure and processes;

4. A banking license, to be independent from other banks and the ability to hold client funds without restrictions;

5 A customer base/CRM, meaning that the fintech bank will have the customers, and a customer support team.

The products directly offered by the fintech bank will be limited to “funds holding”, comprised of: bank accounts (multi-currency); credit and debit cards (multi-currency); eWallet (multi-currency). All other services (investing, trading & brokerage; wealth management; loans, credit & mortgages; crowdfunding (equity and social); insurance; crypto-currencies; payments; remittances & FX; this list is not exhaustive) will be provided by third parties through the API, including old-school banks, financial institutions and fintech companies.

Imagine that you are a client of this “marketplace bank” and that you need a loan. You do not really care if the loan is provided to you by Lending Club or Bank of America, what you look for is a quick and frictionless process to get your loan, and the lowest interest rate possible. “It is a simple mix between an access fee to the “marketplace bank” and a revenue sharing model with the third parties providing additional services.”

Here we have a completely different approach regarding the relationship with incumbents. Fintech banks, thanks to their banking licence, will not rely anymore on any bank to be and stay in business, and so will not be at the mercy of incumbents. What is even more powerful, through the marketplace, incumbents will become “clients” of fintech banks, so the system will be completely reversed.

The beauty of “marketplace banking” is that it competes directly with banks on core banking services without the need to build all the products.

Most bankers are not already worried enough by fintech to react to its coming second wave. This creates a fantastic “window” for us fintech entrepreneurs, to build it, and once it’s done, it will be too late for them to react.

Photos: LTP, Company profiles.

Life.SREDA VC is a global fintech-focused Venture Capital fund with HQ in Singapore