New business models for a new banking environment 💡

New players have arrived on the scene in Europe and are becoming involved in the banking line of business that has, until now, historically been the exclusive domain of, well, banks. As a result, new business models are emerging. We are providing you with a complete overview to guide you in understanding the following new concepts in the current terrain: Banking-as-a-Service, Banking-as-a-Platform, and Open Banking.

Banking-as-a-Service (BaaS): Using APIs to market banking services 💳

Banking-as-a-Service (BaaS) is a model in which an ACPR-regulated institution (or NCA in any European country) offers white-label digital banking services marketed and integrated into the products of a non-regulated company. In this way, a non-banking company can offer its customers digital banking services such as bank accounts with dedicated IBANs, debit cards, loans, and payment services, without having to acquire a “banking” license of its own.

Let's take an example. You want to quickly launch a neobank for teens with a mobile app that blends financial education with an innovative user experience. The services of a BaaS, such as Solaris Bank or Railsbank, allow you—without having a license of your own—to offer an account with a debit card, and you only have to focus on the development of the mobile application and its features.

This mobile application communicates with the bank's system via APIs and Webhooks, allowing customers to manage their cards and access their accounts and transactions. The "non-banking" company using these services will be registered as a BaaS agent, which can be accomplished in a matter of weeks as opposed to the 6-12 months it would take to obtain a license of its own. 

As an agent, the non-banking company does not directly manage the customer’s accounts or money. It simply acts as an intermediary, which means it is not bound by any regulatory obligations.

To facilitate centralized management, BaaS players offer a range of simple and standardized products for all their customers. It therefore seeks to standardize all services, particularly card management services (processing, manufacturing, anti-fraud tools, etc.) as well as contracting services.

Open Banking: Is it the same as BaaS? 

No!  The two models are often confused, but with Open Banking, banks are legally required to provide third parties with access to their banking data. The two models have completely different objectives.

In the BaaS model, “non-banks” integrate the full breadth of financial services into their own products. In the Open Banking model, non-banking companies simply use the bank’s data for their products. In the industry, these non-banking companies are called Third-Party Providers (TPPs).

For example, Personal Finance Management (PFM) applications are prominent TPPs that benefit from Open Banking. They aggregate data from all your bank accounts into one application, allowing you to better manage your finances. This can help you reach your savings goals or improve your spending habits.

In order to aggregate the data, the application extracts transaction data from all your bank accounts. It does this via API integration with the banks' IT systems.

The critical thing to remember is that TPPs cannot provide banking services as they do not hold a banking license. They simply use data from your bank accounts to provide aggregated data or to initiate transactions.

Banking-as-a-Platform (BaaP): The creation of personalized ecosystems 👨‍💻

Banking-as-a-Platform (BaaP), or platform banking, enables the construction of customized ecosystems to meet customer needs. Third-Party fintech companies create financial products and services for bank customers. These services are integrated with banks acting as infrastructure providers.

Building a BaaP architecture without the constraints of legacy systems creates application stacks that serve as building blocks, which can be integrated into an API layer and appropriately matched, or accessed, to develop new and innovative products and services.

In this configuration, banks bring their expertise in security matters, compliance, and especially in distributing financial products. The licensee remains the bank, regulated by the ACPR. As to the banking services the fintech companies offer on the platform, they partner with companies whose cutting-edge technology offers competitive advantages that meet customer expectations for whatever stage the customer is in.

Traditional banks often use the platform banking approach to add value to the customer experience and as an incentive to secure the customer’s loyalty. By integrating fintech services into their platform, they keep their customers in the bank’s network, even if it means giving a share of the revenue to the integrated fintech companies.

BaaP is also a suitable model for building digital banks or neobanks. These new banks, such as N26 or Monzo Bank, will be built on a next-generation, open-architecture platform called the Core Banking Platform. They will be able to offer a broad range of value-added products—as neobanks are now doing—such as invoicing or cash management tools for professionals.

Thanks to the various precepts of Banking-as-a-Platform—namely a composite, open platform based on a microservices approach and open APIzation—these new banks will be able to leverage the innovative capacity of players in the market to tailor their offer and deliver new features quickly.

Bank as a Marketplace? The Amazonization of financial services

The marketplace phenomenon is not new and is increasingly expanding in financial services. More than a simple platform, the marketplace is, above all, a business model driven by data, open innovation, and digitization.

It brings together parties with different needs; it connects product and service businesses with the consumer. The role of the marketplace is to enhance the ability to market products and services while generating added value.

This business model aims to give choice and control to consumers by revealing a broad range of investment, insurance, and credit offers. The consumer compares them and chooses the one that best meets their needs. 

For example, Starling Bank is a licensed and regulated bank that aims to provide a fairer and smarter alternative. Starling offers a broad selection of financial services provided by third parties and includes several insurance, payment, and accounting solutions from which customers can choose. Once the customer selects an online payment system (iZettle or Sum Up), integration into Starling Bank’s application is automatic, thus simplifying and enhancing the customer’s daily experience.

If a customer needs a financial service that the bank does not offer, the bank can refer the customer to a partner that does. In this model, the marketplace owner facilitates transactions between the partner and the consumer, increasing the network effect. Marketplace provides an excellent opportunity for new entrants to the financial sector as it levels the playing field. 

In summary and key takeaways...

Banking-as-a-Service: 

These licensed financial institutions allow lightly regulated companies to directly integrate white-label digital banking and payment services into their own products. The company’s interface is connected to the API of a BaaS, which allows the company to offer digital credit, account management, and payment services through its own applications and websites.

Open Banking: 

Open Banking is a result of European regulation PSD2. It allows registered companies complying with certain security procedures to access bank account data and initiate payments, all with the customer's consent, of course. The TPPs are connected to the banks' IT system via an API to retrieve data. Often there is an API layer between the bank and the TPPs, which is provided by a banking API platform.

Banking-as-a-Platform or platform banking: 

In this situation, banks integrate services from fintech companies in order to offer their customers a more comprehensive range of services from a single bank account. The fintech company’s services are usually fully integrated into the user interface of the bank’s application or its website via an API. In this model, the bank has a partnership with a single player per type of service. 

The Marketplace: 

Here, banks create marketplaces where they integrate services into their application from fintech companies in order to present customers with a variety of financial offerings by type of service or product. The marketplace generates value by facilitating transactions between third parties, not by participating in the transactions themselves. The fintech company’s offers are fully integrated into the user interface of the bank’s application or its website via an API.

What's Skaleet's role in this evolving environment?

Our Core Banking Platform allows financial institutions to design, configure and integrate new products or user experiences through an open, flexible, and scalable architecture. Skaleet offers a banking environment that meets the highest security standards. Our solution allows you to create the following:

• Banking-as-a-Service (licensing, card issuing, and processing services are components provided by a partner);
• Banking-as-a-Platform (under your own license with an extensive network of integrated partners);

• Marketplaces facilitate the integration of many financial offers from the fintech companies of your choice, which they do, thanks to our open, modular architecture.