WILMINGTON, DE / ACCESSWIRE / February 8, 2022 / Banks have been on a multi-decade-long digitalization journey during which they have been called on to respond proactively to client needs for more accessible, efficient, and cost-effective banking by completely transforming their business models.
Bank customers are increasingly unwilling to accept slow service, high fees, and one-size-fits-all products. They want to bank across channels seamlessly, anytime, anywhere and have an experience tailored to their individual and evolving needs.
From the first internet banks launched in the mid-1990s to the first smartphone banking app brought to market in 2011 and now Banking as a Service (BaaS), banks have had to confront the reality that if they don't keep pace with the rapid pace of innovation in the industry, they will fall behind.
FinTechs are setting the pace and have been since the 1990s. Thus, banks face the choice of whether to compete with these disruptors or, instead, partner with them.
Open banking changed the game, but Banking as a Service (BaaS) ups the ante even further by introducing a new way of distributing banking products to clients. It enables banks to provide non-financial services companies with their existing banking products and solutions, which they, in turn, add to their ecosystem and offer to their end clients. Also described as embedded finance, McKinsey describes BaaS as bundled financial services offering, often white-labelled or co-branded services, that non-banks can use to serve their customers. According to McKinsey, industries increasingly looking to add financial services to their offerings are retailers, telecommunication companies, the Big Tech companies and software companies, car manufacturers, insurance providers, and logistics firms.
The benefits for banks are that BaaS gives them access to low-margin, high volume business off its existing cost base by accessing new customer bases. The non-banks benefit from providing their customers with added-value financial services without applying for their own banking license - a costly and challenging process - and increasing their loyalty to their brand. The customer benefits from the ease of use of accessing financial products through a preferred service provider or retailer.
BaaS financial services can be enabled in a variety of ways. Back-end as a Service (also BaaS) and APIs are proving increasingly popular. BaaS is an outsourced cloud-based technology platform that takes care of basic, repetitive tasks, enabling developers to focus on the front-end user experience. APIs are software that allows two applications to talk to each other. Then there are advanced digital banking software platforms that are modular, flexible, and turn-key.
Is BaaS really the way to go?
BaaS and other API-driven technology are being considered preferred solutions by financial organizations because of their numerous advantages, including the short time-to-market, the limited capital expenditure involved, and the lower operating expenses.
However, API solutions and cloud-based BaaS don't solve all the problems banks and non-banks encounter when setting up an embedded bank offering.
Developing the APIs and back-end software internally can be extremely costly for the bank. JP Morgan, for instance, has employed 50 000 software engineers and plans to invest $12billion in technology in 2022 - news that sent the bank's share price tumbling.
Some of the other issues that make BaaS offerings unattractive for building new products are:
- Lack of flexibility. Most BaaS platforms are being distributed "as is," and customers should not expect any customizations to be made. While many BaaS solutions on the market cover many types of businesses and use cases, many businesses still require more attention than BaaS vendors can give.
- Lack of geographic coverage. Getting to the global market is the most common goal for many FinTechs, but few BaaS vendors can provide this kind of geographic coverage. So, one day, when customers need more flexibility from their vendors, will they get it?
- Data protection. BaaS platforms are typically built using multi-tenant architecture, meaning that all clients share the same back-end resources, which may have critical implications for the data storage. Certain types of customers and regulators are not comfortable with this approach due to security concerns, and BaaS companies are not always transparent about the architecture of their software solutions.
- Ownership of Intellectual Property. Building a product on top of the existing back-end API means your business becomes locked into a single vendor, the owner of the intellectual property. Some companies offer highly attractive pricing for startups looking to get the product to the market without making a substantial initial investment, but then customers end up paying more if the product is successful because they don't have access to the IP. Thus, starting with an enterprise solution does not always make sense for new product initiatives, as you can lose more than you could gain as the proposition grows.
- Migration and support. Many BaaS platform solutions are focused on serving newly established companies and products. But many existing businesses would love to buy modern cloud banking software. However, they often struggle because the data migration and system integration services offered by those suppliers are lacking.
What are other options?
Velmie's mission as a banking software company is to solve these challenges by bringing next-generation banking software solution coming with the unique attributes such as
- Modular approach, based on microservices architecture, ensures greater flexibility because modules can be customized and configured independently for each customer.
- Ecosystem. Velmie has built up an extensive network of partners and integrations, allowing banking solutions to be configured for all local markets.
- Data security. The software is usually based on single-tenant systems, with no shared resources between different customers. Different customers' data is kept independently, which means that if one customer's data is breached, other customers' will not be compromised. It also allows user experiences to be customized.
- IP ownership. Customers have more control and flexibility over managing and expanding their business because Velmie shares the IP rights with the client.
- End-to-end delivery. Customers don't have to gain expertise and resources required for system integration and support as it all handled by Velmie.
BaaS offers immense potential for both banks and their non-bank partners. But the long-term success of the offering depends on the sustainability, scalability, and flexibility of the digital banking platform. What looks less expensive now could prove far more costly in years to come. So, you must choose wisely to ensure that your system provides the superior financial services and customer experience you are seeking.
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SOURCE: Velmie