Open Banking is here to stay, thanks to central regulation along with marketing initiatives by individual banks. By integrating third-party innovations introduced as open APIs, banks can create a new framework that supports the realities of the dynamically adjusting financial market.

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Banking as a Service (BaaS)

We no longer live in a world where one provider of financial services builds the entire customer experience. Banking services must now be offered by doing business through a comprehensive digital interface. This is the platform known as Banking as a Service (BaaS).

Platform owners offer specific services employing third-party’s APIs. Built on top of the bank’s own service as well as from other companies (such as tech startups), the banks offer them in a cloud-based SaaS model to their user customers, like banks, insurers and other financial institutions.

Banking as a Platform (BaaP)

BaaP allows banks themselves to become infrastructure providers to third parties. By providing an architecture where the constraints of legacy systems are eliminated, it creates building blocks  – technically referred to as application stacks- accessible to third parties.  New products and services are created through a “mix-and-match” process through the API layer. What the banks bring to the mix is their expertise in security, authentication and compliance. The APIs from fintechs bring in agility, flexibility and new capabilities.

Banking as a Marketplace (BaaM)

Banks are now offering customers a range of products and services from other providers, turning themselves into top-level marketplaces. Regulations such as PSD2 in Europe make this a two-way street. Banks are working on open APIs which give others access to their customers’ information. In return, they can use whichever APIs they need to meet market demands. This brings them innovative alternative fintech solutions.

If a customer required a specific financial service that the bank doesn’t offer, the bank will find a partner that does. A marketplace facilitates transactions between the supplier and the consumer. Turning banking into a marketplace offers an excellent opportunity for new entrants to the financial industry by leveling the playing field.

As a corollary, security is being built-in to open banking at every level. The assurance is that proper mechanisms are in place to provide security, such as strong authentication and additional measures to protect sensitive information from unauthorized access throughout the entire process.

Open banking

With the structure based on a BaaS platform, it is possible to improve banking processes and increase convenience for banking clients. It is creating fintech banks that can compete directly with banks by offering core-banking services without re-inventing all the products that would be needed. The API-based BaaS platform serves as the back-end for the new startups and integrates them seamlessly into the legacy systems of traditional banks.

Potential effects

There are multiple ways that the customer’s front-end will be presented. One possibility is for the BaaP provider to appear as a bank directly. The bank would look just like any other online bank where all banking services are presented in a single user interface. Another option is that the bank will simply sell itself as a ‘white label bank’ acting as a “software as a service” provider to the client bank, operating as its front-end to the customer. White label banking can be used to offer banking services in markets where a large group of users already exist, such as e-commerce.

Using an integrated BaaS platform frees the service provider from having to develop all the needed services, including authentication and other security services.

What BaaS, BaaM and BaaP will mean for SMEs

BaaS, BaaP and BaaM providers have been prominent in the retail banking space, especially starting to set trends in the Small & Medium Enterprise world. In the USA, for example, PayPal has recently launched its “Business in a Box” service. It targets SME business owners wanting to set up an online presence from scratch. Now, employing a partnership with WooCommerce and Xero, customers can build an online store complete with all accounting features. An example of a white label is Bud, which at first is building a marketplace for IBAN account holders, and will later offer a “pick-and-mix” platform for SMEs.

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