Banking as a Service Is on the Horizon, What Comes Next?

Banking as a Service Is on the Horizon, What Comes Next?

Author: Collin Mellott, Director, Innovation & Disruption

In 2019, Russ Oatman, Sr. Vice President of Treasury Management at FNBO, wrote an interesting article about open banking, introducing the concept of Banking as a Service (BaaS). Since that time, we’ve seen the banking industry start to move more rapidly toward a BaaS model, and FNBO has been following the trend to identify where opportunities exist.

BaaS is defined as a product delivery model that allows traditional banks to easily access new capabilities from fintechs and other third-party developers and integrate them into their end-to-end customer experience.

Banking as a Service begins with open APIs or application programming interfaces, a connection layer between all of the bank’s data and the products that use that information. APIs have been at use within banks for decades but were previously closed, meaning that only the bank could access these interfaces to build new products or services.

Now, with the advent of BaaS, we are seeing banks opening up their API’s to third-party providers, inviting extended innovation from outside the financial institution. The advantages are many, but like any new technological movement, it warrants careful study and consideration.

Here is what you can expect from the BaaS movement and how FNBO is addressing Banking as a Service.

The Customer Advantages of BaaS

The financial services world has found many elements of BaaS compelling. First, a BaaS model allows banks to break into new markets, serving more customer needs by integrating new channels, such as commercial banking.

Second, how customers manage their money, move money and access money is evolving as well. Not all of those functions need to be done at a bank.

Currently, 54 percent of customers use third-party apps to simplify money management. One example is an app that allows consumers to sync all of their financial accounts and bills to view them at a glance. These types of apps are changing the game by offering better experiences and broader choices than were historically available through a bank relationship.   

BaaS models make it possible for banks to offer these same types of products and services to customers by connecting trusted third-party innovators directly to the bank’s platform. The customer is able to integrate the world of products necessary for sound financial management into a single seamless experience.

In this way, BaaS may sound similar to other emerging banking models, such as open banking, embedded finance, white label banking and API banking. However, BaaS focuses on integrating all of the service providers necessary to create a better customer experience, even incorporating non-financial features and products if they help customers more easily manage finances.

Imagine logging into your banking portal, budgeting your money, paying bills, automatically moving money from checking to savings based on your spending habits, or applying for an automobile loan with your bank directly from the dealership where you buy the car. This is all right around the corner with a BaaS model of banking.

FNBO’s Approach to BaaS

While the UK has passed regulations requiring banks to move toward open banking in support of a BaaS model of operation, the U.S. is taking a more moderated approach, allowing financial institutions the time to thoroughly explore the pros and cons of open banking before adopting a Banking as a Service model.

At FNBO, this allows us to pursue a customer-led direction toward adopting BaaS, and to thoroughly explore the innovative and embedded offerings that will best meet the needs of our customers. It also allows us to pursue questions the industry has yet to answer, such as the best ways to ensure security.

Government regulation is another currently unanswered issue that we are investigating. The banking industry is a highly regulated industry. Since most were developed before the advent of open banking and BaaS, it is important to understand how to remain compliant as we open developer portals and invite innovation.

As the era of open banking continues to unfold, FNBO is taking a well-measured approach toward BaaS, to ensure that we will continue to meet the current and future needs of our customers and to provide a safe and secure environment for banking.

About the Author

Collin Mellott has been driving marketing and digital strategy for a unique blend of start-up companies and recognizable brands in the financial services, retail and technology space for over 15 years. Prior to joining FNBO, he led partnerships, digital marketing, acquisition and customer management marketing for the Cabela’s and Bass Pro Shops credit card program in collaboration with Capital One. Today, Collin is working to understand new business model opportunities for FNBO as a part of the Innovation & Disruption team.