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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.
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.
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.
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:
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.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Alex Kreger Founder & CEO at UXDA
22 August
Nick Green Director at Purple Patch Broking Ltd
Priya Kumari
20 August
Oleg Stefanet Chief Risk Officer at payabl.
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