Long reads

Utilising Banking-as-a-Service for personalised propositions

Madhvi Mavadiya

Madhvi Mavadiya

Head of Content, Finextra

With the shift away from one-size-fits-all, product-centric models to transparent customer-centric alternatives, the necessity of accommodating unmet needs will become central to competitiveness. Research by Deloitte found that customer centric companies were 60% more profitable compared to companies that were not focused on the customer. Further, a 5% increase in customer retention can increase profits by 25% to 95%, according to research from Bain & Company.

According to the Capgemini World Retail Banking 2019 report, open finance creates the possibility of an end-to-end, integrated experience for the consumer, even if their data and service needs span multiple organisations. From a consumer perspective, this means getting a more holistic view of their financial information, most likely leading to better advice, reduction in operational effort, and error arising from copying data between service providers.

This is an extract from the Finextra and Amazon Web Services (AWS) impact study on ‘Open banking powered by the cloud, democratising finance at scale.’ Click here to read.

Consumers now crave more control over their finances and convoluted legacy processes impede this progress. Pushing toward a value-based experience provides banks with the opportunity to address the unique requirements of all customers in a tailored manner. Delivering against the ‘average customer’ will not sustain profits, particularly when non-financial brands are looking to BaaS to enable payments services that can be embedded into their digital apps.

BaaS enables a faster time to market for more personalised propositions through API endpoints in the cloud to provide non-banking enterprises with frictionless financial services. Advanced analytics on the data collected through these endpoints also offers further monetisation opportunities to these companies. Financial institutions must capitalise on this. Capgemini’s view is that financial institutions offer many products across the full lifecycle of production, distribution, and servicing. However, this emerging landscape gives them unique opportunities to move more towards becoming ‘composable’ service providers.

What this means is that a financial institution may decide to leverage its strengths and only distribute product A while consuming the ‘production’ and ‘servicing’ capabilities from another service provider. For product B, functionalities can be composed differently. One key requirement to be noted is that institutions need to become ‘digital to the core’ and migrating to the cloud is a critical part of this journey.

Finconecta reiterated that consumers are increasingly demanding more product choice, higher personalisation, data protection, and financial services embedded in their day-to-day journeys. The complexity of this demand requires that financial and non-financial Institutions team up and collaborate, complementing strengths. While open banking allows third-party providers to access and utilise financial data to expand or enhance their products, banking-as-service allows them to integrate financial services into their offerings through embedded finance.

Financial institutions are now able to monetise their assets – such as banking license and KYC functionality, among others – under a banking-as-a-service business model. This alliance between financial and non-financial institutions opens embedded finance, as a seamless and high-quality customer experience that permits financial and non-financial transactions in the same platform, while keeping high standards in data privacy. Again, competitiveness is one of the greatest advantages of embracing open finance, allowing financial institutions to remain competitive by offering consumers greater product choice while keeping control of their data.

New business models such as BaaS and embedded finance demand financial institutions to challenge their traditional role in the value chain of providing financial services. Traditional financial institutions become the backbone or infrastructure for the services provided by third parties. This new approach expands sources of income, such as monetising assets, considered as expense, transforming them into revenue generators. This is only possible by fostering collaborative frameworks where different players join forces to reach better and faster solutions for both banked and unbanked clients.

On revenue, for Tink, publishing open APIs may be a compliance requirement in some jurisdictions, but it is also a good strategy to generate new revenue streams and modernise IT operations. Financial institutions can, for instance, look to generate indirect sales by enabling partners to provide financial services, such as current accounts, loans, insurance, and so forth. It is also possible to issue APIs for data points that are not available in the customer interface. This may include attributes to allow third-party providers to verify the identity of a customer or insights from the customer’s transaction history.

Financial institutions can explore how ingesting financial data into their own systems can help modernise their operations, recycle code, accelerate innovation, and create more value for their customers. While the new generation of fintech firms is moving away from form-based registration processes, single sign-on (SSO) is taking over e-commerce. Consumers now expect nothing less from their financial service providers.

This is an extract from the Finextra and Amazon Web Services (AWS) impact study on ‘Open banking powered by the cloud, democratising finance at scale.’ Click here to read.

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