Open banking is increasingly becoming a regulatory requirement across the globe. Banks with an online presence must provide access to data to approved trusted third parties. This involves quite an investment as to enable this the bank must develop and publish a set of application programming interfaces (APIs) and support developers using these APIs.
In Europe and the UK, the regulation also requires banks to allow payment initiation through APIs. Banks cannot charge for this, they simply have to provide it. Quite rightly this raises concern of disintermediation as it allows fintechs to develop alternative access to banking data for customers. For example there are a number of chatbot providers like Chip, Cleo and Plum and app providers like Emma and Snoop whose value proposition is based around aggregating banking data from multiple banks so customers can see their accounts in one place. The key point is that open banking is quite an investment and for seemingly no return for banks?
For a few years we have seen licenced banks going beyond open banking and opening up a broader set of APIs than that demanded by open banking regulations. These go as far as a third party creating new accounts and on boarding customers or just more granular services like managing payments, know your customer (KYC) checks or credit risk, for example. By doing this, banks are able to charge for these services and this spawned the trend of Banking-as-a-Service (BaaS). The customers of these services could be other banks, fintechs or tech offerings in other industries like property (proptech). Hence the potential market for BaaS is huge.
The advantage to the BaaS customers – the companies that will “consume” these services – is not only access to banking data (with customer permission), but to banking functionality, hence the term “embedded finance” trending since last year. Essentially this is where a company “embeds” banking capability into a broader service for example doing KYC and credit checks for renters (e.g. Cubic Lease). BaaS also enables companies to “white-label” a banking product like a current account or debit/credit card. Whilst this has been possible before (in the 90’s many supermarkets partnered with banks before getting their own licence), BaaS offers a more scalable and open approach to this.
BaaS providers fall into two main categories: banks and technology companies. As I alluded to in my last article, both compete with traditional and new vendors of banking software. Banks providing BaaS include players like BBVA, GreenDot and Starling, the latter also offers “Payments-as-a-Service” for a number of fintechs. On the technology side players include the likes of SolarisBank, RailsBank and Treezor.
For banks, BaaS means creating and operating a more technology like sales organisation. Whilst for technology providers that obtain banking licences like SolarisBank they clearly have to operate a licenced bank whilst selling a technology-based service.
If you step back and look at this, we have banks now buying from and competing with technology companies. We also have tech companies selling to and competing with banks. Then we have traditional software companies of banking and payment solutions selling to both parties, hence the boundaries of customer and competition are seemingly blurring and confusing.
Inevitably, we will see banks buy technology driven competitors but there are tech providers that are also accelerating their entry to market by buying banks.
Fintech’s and other companies now have a broader set of choices where to get banking services to embed in their offerings. The real winner should be customers getting better/cheaper products and services in frictionless journeys (aka experience driven banking).
However, as we have seen with the WireCard scandal we cannot lose sight of the need for regulation and how we must protect the end customer too.
In over 30-years of banking, I have never seen a more complex and competitive landscape as there is now. On top of this, we are seeing the growth of crypto which has its own complexities, risks and opportunities. Depending on whether you are a glass half full or half empty person, there has never been a more exciting or scary time in banking. I take the positive route and see not only greater choice for banking customers but also a huge increase in financial inclusion.
About the author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.