Companies adapting to the new normal brought on by the pandemic have been forced to undergo a digital shift toward contactless payments and a surge in online transactions. As a result, many are looking to Banking-as-a-Service (BaaS) to enable innovative financial and payments services that can be embedded into digital apps and products. Further, the deployment of BaaS enables a faster time to market for more personalised propositions.
BaaS providers like Solarisbank are offering application programming interface (API) endpoints in the cloud to provide their customers, such as non-banking enterprises, fintechs, as well as other banks, with frictionless financial services. Advanced analytics on the data collected through these endpoints also offers further monetisation opportunities to companies.
Finextra spoke to Stephan Schmidt-Tank, head of the Financial Services Specialist Team in EMEA, Amazon Web Services (AWS) and Hima Mandali, CTO at Solarisbank AG about leveraging contextual finance and how that enables personalisation (or contextualisation) of the user experience and how the cloud enables new revenue streams.
Embedding fintech in everyday transactions
With end-to-end banking services being accessible to third parties through a simple, standardised interface, financial players like Stripe have “revolutionised payments, because they allow other businesses to integrate payments through an API, with just a few lines of code,” says Schmidt-Tank. “Now, major websites like Shopify or Instacart are using Stripe.”
Further, he says, this ‘behind-the-scenes’ approach means that the consumer receives a more frictionless consumer experience, as payment providers facilitate the customer’s real mission to pay for everyday life items; book their holiday; buy a home; or finance a car the easiest way possible.
He goes on to say that artificial intelligence (AI) and machine learning (ML) can further remove friction. For instance, by analysing behavioural patterns to authenticate card transactions and eliminate usernames and passwords. AWS customers are using services like Amazon Sagemaker, a fully automated machine learning service, to securely and compliantly analyse anonymised data points in real time—from typographic rates to patterns in technology to detect anomalous activity and proactively intervene before a fraudulent transaction occurs.
“Customers expect frictionless payments and seamless payment interfaces, where authentication and fraud management, for example, are conducted behind the scenes.” Schmidt-Tank adds, “Ideally, payments are deeply embedded within the app or the transaction, so it doesn’t take any additional effort for customers to execute.”
That is the promise of contextual finance. While such payments have been in play for a number of years, today APIs and cloud-based technology have given this concept the technical foundation and maturity to scale.
11:FS research estimates that the total worth of the contextual finance market will reach $3.6 trillion by 2030. Richard Hodgson, CFO at Global Processing Services, believes that “the BaaS model has now reached a level of maturity that will likely see a proliferation of brands capitalising on it in 2021.”
Schmidt-Tank sees Solarisbank as a good example that demonstrates this new business model. “We are, of course, excited that Solarisbank decided to be the first bank in Germany to migrate fully to AWS. What is more, it’s fascinating for us to see how they are using APIs and the technological capabilities of the AWS cloud to build and grow a new business rooted in the idea of contextual finance.”
Speaking about their decision to obtain a full banking license in Germany, Mandali explains the importance of offering a “comprehensive banking product,” and that enabling other businesses to have “fully compliant financial services” required them having that license. “The providers with an e-money licence cannot offer lending services or customer protection under the European Deposit Insurance Scheme,” Mandali clarifies.
“We operate in a very young market, Banking-as-a-Service, and that market is built on trust,” he adds. “The banking license helps, but it is important to have a cutting-edge tech stack. This combination allows us to be a fully-fledged Banking-as-a-Service provider.”
In addition to this, Solarisbank’s ability to “passport” their banking licence to countries within the European Economic Area will enable them to expand on an exponential level. For example, the BaaS provider has launched digital banking and cards in Spain and France with challenger bank Vivid Money.
An opportunity for incumbents to innovate
Mandali states that while fintech firms are operating in the cloud, very few traditional banks have completed their migration journey and many still operate with legacy infrastructure.
As a result, non-financial players are turning to BaaS and leveraging what is referred to as contextual finance. This enables the companies Solarisbank serves to provide services such as payments and e-money, lending, and digital banking—building valuable connections with their customers through integration.
Mandali reiterates: “Financial services should be an organic part of life, not hidden behind brick walls and reams of paperwork. For example, Samsung in Europe has the potential to become a leading financial service provider with Samsung Pay, a virtual Visa debit card with an integrated buy-now-pay-later service called Splitpay.
“With the amount of data already leveraged, combined with the additional data they could generate from customer payments, transactions, and lending, companies could create a superior customer experience,” Mandali says.
However, he continues, “the truth is that contextual finance has just started.” While there are pioneers, most of the larger players are still evaluating how they intend to develop. He adds that the barrier to entry is also high for non-financial players, since this new development is an unknown territory in an already heavily regulated industry.
Beyond context, towards customisation
As Schmidt-Tank highlights, the contextual finance business model can be viewed as an opportunity for established financial institutions to build new experiences for customers, and, in turn, increase innovation and agility.
These two traits are key, as they give financial players the opportunity to collect data with open APIs and react to customer behaviour in real time, while launching and adapting contextual finance services at the right time. It enables financial institutions to work backwards from customers’ needs more effectively and more often.
“Speed matters here, perhaps even more than in other areas in financial services. The cloud supports this materially, by letting customers deploy infrastructure and technology services several orders of magnitude faster than on-premises.
“Also, financial institutions can access a plethora of robust technological capabilities that allow them to innovate faster on behalf of their customers, continually adding more and more services by tailoring APIs to meet the consumers’ needs.”
In addition to innovation and agility, reliability, performance, and security are critical for Banking-as-a-Service, especially when building secure APIs, storing large amounts of data in the cloud, and leveraging an array of data analytics capabilities that can be used to understand customer signals.
These are all reasons why Solarisbank has migrated all of its core banking systems, digital products, and databases to AWS, making it the first bank in Germany to fully migrate to the cloud.
According to a Salesforce report, 66% of customers expect financial institutions to understand their unique needs and expectations, but only 27% feel that the industry is fully customer-centric or that it provides great customer service and support.
Over the past year, the personalisation of financial services has become increasingly important, especially as Covid-19 has created completely new economic circumstances and changed customer behaviour and spending patterns. As this environment changes, financial players must detect new patterns and personalise their services, bridging the gap in their expectation, as shown by the report.
For example, credit companies are crunching transactional data to understand consumer spending behaviour and tailor their loyalty and reward programmes, as spend in categories like travel, hospitality and entertainment have seen a precipitous drop.
“Those who are able to analyse new behaviours quickly and can adapt to a fast-changing environment with agility, will win,” Schmidt-Tank says. “This is what the cloud enables, fundamentally.”
National Australia Bank, Australia’s leading business bank, adopted a cloud-first strategy in 2018 using AWS compute, storage, database, and analytics capabilities as part of their strategy. “Since then, the bank has been able to build new services to deliver better customer experiences, including migrating their business banking platform, NAB Connect, to the AWS Cloud—the first major Australian bank to do so,” says Schmidt-Tank.
How the cloud helped
Comparing his experience pre- and post-AWS migration, Mandali posits that, prior, Solarisbank had a heavy reliance on infrastructure teams, a lack of access to much-needed self-service capabilities, and slow time to market.
“After the migration, our teams were empowered to be more self-sufficient, and it helped to foster dedication to the product being built, super speed to market, focusing on what you own, and the ‘you build it, you own it’ kind of mentality.”
Considering what advice he would give other firms contemplating a move to the cloud, Mandali concludes: “Don't build new stuff in old stuff. If you keep building in your legacy infrastructure and you have a migration plan of five to 10 years, you will never be able to leverage all the advantages of the cloud.
“You can definitely achieve speed and optimality if you do it right. Invest a lot of time in strategy, prepare the migration, and educate your teams. Make it a number-one priority and ensure it becomes a bigger topic across the organisation to move as fast as you can into the cloud.”
Download the report on how financial institutions are offering innovative contextual finance solutions on AWS here.