Banking-as-a-service: The Logical Evolution to the Banking Sector

Digital transformation within the banking sector has disrupted conventional banking practices. While some individuals in India still choose to log in to their online banking portal to make payments, check balances, reconcile accounts, apply for a loan or a credit card, most Indians now use their banks’ mobile apps or digital wallet platforms like Google Pay and PhonePe for these activities. It wouldn’t be farfetched to speculate that in the coming years we wouldn’t even need to visit a bank branch as all banking needs would be met through our smartphones. But how did it all start?

Technological integration at banks in India started in 2013, when YES Bank and RBL Bank exposed their API to other developers to build innovative financial services. Subsequently, ICICI, RBL Bank, Kotak Bank, DCB Bank, and several others adopted this approach. Today, the ‘ICICI Bank API Banking portal’, that comprises 250+ APIs, enables developers of prospective partner companies around the globe to seamlessly sign up on it, create an application, select the application, test it out, and get the code. With this, businesses, fintechs, corporates, and e-commerce start-ups can easily partner with the bank and co-create innovative customer solutions in a frictionless manner, all from the convenience of a single portal. 

Banking as a service (BaaS) can be defined as the end-to-end process that allows fintechs and other third parties to connect with banks’ systems directly through application program interfaces (APIs). By connecting through APIs, technology companies can build banking offerings on top of the providers' regulated infrastructure. As banks evolved their business, they focused on creating separate analytical practices, such as operations analytics, compliance analytics, and credit risk analytics. Eventually banks realized that these practices shouldn’t be siloed and needed to communicate with each other. With the need for integrated banking analytics and services, big tech companies like IBM started gaining more prominence in the financial sector.  

Back in 2013, API banking was limited to powering few of the leading wallet providers who didn’t have a PPI (Pre-paid Payment Instruments) license. Soon enough, many other banks like ICICI Bank, DCB Bank, and Kotak Bank followed suit. Then came demonetization in November 2016, where Quikr started operating CashNoCash, an application that directed users to the nearest ATM where cash was available and even told them how long they would have to wait in the queue. Quikr did this through an API which was crowdsourced. Like Quikr, the banking industry must become even more agile in API integration with backend legacy systems, in order to fast-track BaaS in India. The Indian banking sector should pay heed to the BaaS developments in the West in order to learn and adapt faster. Companies that provide BaaS solutions start as neo-banks (banks that are digital only, that reach their customers through mobile apps and personal computer platforms) and go on to become challengers. A prominent example of this is Atom Bank, one of the first mobile-only banks in the UK. Since obtaining a bank license is time-consuming and expensive, such companies choose the route of BaaS in view of reinforcing their future and even serving other banks. 

Cloud adoption complements BaaS 

Cloud-based core banking is still at a nascent stage of adoption. In fact, it has been prevalent in the U.S. for about three years. According to Adobe’s 2018 Digital Marketing Study, only seven percent of financial institutions have implemented a cloud-based technology stack. In India, the adoption of cloud-based core banking is just picking up. Newly licensed Small Finance Banks and Payments Banks are increasingly taking on cloud computing for their core and surround banking solutions. This is because cloud computing is helping them to decrease their capital investments on IT infrastructure. To give an example, Nelito, an Indian software solutions and service provider offers financial institutes the ability to migrate from existing legacy systems to cloud core banking platforms. 

Mini-Banks

With the advent of BaaS, banks are now able to expose their services to other fintechs and big tech companies to offer personalized products and services. Take for example Apple’s partnership with Goldman Sachs to offer, Apple Card. Through this partnership, Apple was able to launch a ‘mini-bank’ so to speak on top of the BaaS infrastructure provided by Goldman Sachs. Goldman then announced its partnership with Amazon where they’re developing technology to provide lending through Amazon’s lending platform, potentially reaching thousands of enterprises that sell through the e-commerce giant. In the future, cloud-based applications like Uber, Amazon, or Apple iOS will be the primary way many consumers will choose to bank. Within the next ten years we probably won’t ever need to visit a bank, or even their website, to utilize and engage with a financial service. Digital platforms will be able to offer us the banking services we need natively within whatever application it is we are using. 

The Road Ahead

Besides the push for integration of APIs with legacy backend systems, there’s a dire need for advocacy on open APIs. This is where the collaborations between financial institutes, fintechs, and big tech companies are crucial. Financial institutes can leverage the niche expertise of technology companies to offer newer and more innovative services to their customers. Thus, the only way to fast-track the BaaS model in India is the increased partnerships between all the stakeholders.