Opening the Payment Rails: Understanding Banking as a Service
Financial technology is moving at a rapid pace and with new developments every day; it can be hard to keep up. However, you may have heard of a new concept called “open banking” that is worth taking a closer look at as it has the potential to improve the customer experience, provide businesses access to new revenue streams and change the way we bank.
When understanding open banking, it’s good to first take a step back and look at the technology banks have built over time. Over the course of history, banks have invested billions of dollars into the core banking platforms that help consumers and businesses move money and manage accounts, all while complying with numerous banking regulations. Banks have used technology to make transactions streamlined, convenient and, most importantly, safe. As the speed of transactions has continued to increase and new payment platforms have become available, banks have continued to show their expertise in security, authentication and compliance.
Banks are built on traditional payment rails, which comply with banking regulations. These “rails” allow payments to move from payers to payees in a secure environment. Thanks to application programming interfaces (APIs), third parties now have access to these payment rails, creating open banking. This has led to Banking as a Service (BaaS) which integrates payments and banking services to create a seamless user experience end-to-end over the web. With BaaS, banks provide the core banking platform—a robust, secure, compliant platform from a trusted source—while third parties (such as FinTechs or legacy companies) can plug into the bank’s platform via APIs.
BaaS is an important development in finance because third parties can now integrate banking and payments into their core business models, creating seamless user experiences. It allows third parties to offer banking services without owning a bank all while controlling the customer experience.
BaaS also offers an opportunity for FinTechs to move away from point solutions and build applications for specific customer needs while leveraging the benefits the banking rails provide. When using BaaS, FinTechs are able to quickly deploy financial products without having to contend with extensive banking regulations and compliance requirements. They can attain scale quickly and leverage banks’ core infrastructure and stable client base. BaaS allows FinTechs to focus on what they do best: innovate.
Of course, BaaS makes it easier for FinTechs to access the banking rails and thus to encroach on banks’ territory. But FinTechs need banks in the BaaS arrangement—they need banks’ core systems and, perhaps more important, the trust and loyalty banks have with their clients. Their best option is to play nicely with their bank competitors and turn them into friends, not foes.
When approached strategically, the movement toward BaaS is an opportunity, not a threat, to banks. Many bank clients are moving away from traditional banking and asking for customized, innovative, digital services. BaaS empowers banks to give these clients what they want by partnering with the FinTechs they once saw as threats. Rather than spending the time and money to develop or integrate financial services applications, with BaaS banks can simply plug into third-party developers’ apps to offer next-generation services almost instantly.
For all parties involved, BaaS facilitates strategic advantages that could prove transformative. For banks, BaaS enables greater flexibility, faster speed to market, and an improved customer experience. Third parties can offer more services across a wide array of users and give customers better, more tailored user interfaces. Bank clients, meanwhile, benefit from having financial solutions that are uniquely tailored to their needs, proving that BaaS is a winning solution for all.
About the Author
Jason Hagan leads Wholesale payments strategy and product development for First National Bank of Omaha. He joined the bank in 2013 to develop and implement the bank’s payments and partnership strategy. Jason also leads the Wholesale Bank Investment process.