Banking as a Service: Competition Meets Collaboration in the Age of Value Networks

There was a time when banks knew who their competitors were. For the most part they were other banks and financial services providers. Pretty simple. But with technology taking center stage, fintechs seem well positioned to move even further into the banking space. But are they really? As Hugues Delcourt, Chairman of KNEIP and former CEO of Banque Internationale à Luxembourg suggests, “Banks need fintech and fintech needs banks.” In this blog we explore Banking as a Service and consider the merits of collaboration and competition in the new age of value networks.

A “value network” is essentially a set of connections between organizations and/or individuals interacting with each other to benefit the entire group. Value networks allow members to buy and sell products as well as share information; the value network participants rely upon each other in a shared ecosystem that is intended to foster growth, enhance innovation, and increase value.

By definition, value networks involve inter-dependence. In the banking world disruptive forces have reshaped the banking landscape and are redefining what it means to be a bank. Legislative initiatives in global locations encourage open banking to spur innovation and competition. This new age of banking competition is also one of bank/fintech collaboration and inter-dependence.

More and more, banks and fintechs that compete in certain markets may choose to collaborate in others. And, while neobanks may be the upstarts that purport to revolutionize banking, many rely on incumbent banks for processing services and to help them navigate the perilous waters of regulatory compliance. 

BaaS – Collaboration at Work  

Banking as a Service (BaaS) is an example of bank and fintech collaboration at work. It combines multiple service providers to offer an integrated service that’s greater than the sum of its parts. Although not limited to banks, there is always a bank involved to ensure legal compliance with the laws in the jurisdictions where the service is offered. Other participants are most likely to be fintechs that offer tech know-how but do not have their own banking license.

Cloud and multi-tenant platforms are also reshaping how bank services are manufactured and delivered, and this trend is accelerating. BaaS offers sustainable benefits to banks, their partners and bank customers. It is becoming mainstream, and banks need a modern infrastructure to succeed. 

The BaaS model empowers fintechs to deliver innovative digital banking services quickly. In a cooperative and collaborative model, licensed banks provide access to their infrastructure with application program interfaces (APIs); new customer-centric products can then be launched rapidly, and with minimal capital outlay. In this way neobanks can offer a full range of bank and payment services in markets where the licensed bank may not operate.

Taking a closer look at BaaS, compliance can be built into a BaaS platform, enabling fintechs to meet all the requirements of even the most complex regulations, such as GDPR, PSD2 and AML4. With a robust BaaS model, a fintech can penetrate highly regulated markets confidently and cost-effectively. Services can be packaged and delivered in context where customers want them: The possibilities could be boundless.

BaaS is technically possible with just a few lines of code using APIs. In simple terms, APIs and webhooks enable the bank’s server to communicate with the service provider, and the end customer accesses financial services directly through the service provider’s website or app. The important point is that the service provider is a conduit for the bank and does not handle the customer’s money. BaaS is a perfect example of “white-label banking” that extends a bank’s reach into new markets and geographies. But, as with all modern banking, success requires the right strategy and the right technology.  

Multi-Tenancy and the Cloud

With the growth of shared services throughout banking, multi-tenancy capabilities are quickly moving from leading edge to table stakes for a modern banking platform. To participate fully and cost effectively in open banking and BaaS, a core bank platform should ideally be cloud-native and support multi-tenancy. Multi-tenancy is at the heart of cloud computing; it allows a single institution to efficiently operate multiple brands, and also supports multiple-financial institutions’ issuing business on a single platform, all with a clean segregation of institution data. Multi-tenant platforms support the most complex of financial organization structures, and they are efficient and secure. Each tenant shares the application software and a single database, but each tenant’s data is isolated and remains invisible to others.  

Sustainable Benefits

Benefits of BaaS and a multi-tenant architecture are technical, financial, and sustainable. These include:

• Costs are affordable, predictable, and aligned with success. Banks can charge for services without the worry of substantial periodic investment in technology. 

• Ease of integration. A cloud environment simplifies integration using APIs, and all network customers / participants are choreographed in real time. 

• Maintenance and upgrades are streamlined as there is only one instance of the software.

The bottom line is banks will likely need fintechs even more in future, and we already know that fintechs need banks. Thus, this new age of banking is one of both healthy competition and mutually beneficial collaboration.