An introduction to banking-as-a-service innovation
Welcome to ‘open’ banking-as-a-service, brought to you by Application Programming Interfaces (APIs)
Financial Technology (fintech) companies use and develop software and apps to transfer, lend, and invest money.
Transferring, lending, and investing were once the exclusive domain of brick-and-mortar banks. Still, banks are increasingly being displaced from modern money management by technologies and innovations like mobile payment apps, cryptocurrency, Google Wallet, Apple Pay, and AI-backed investing.
Fintech companies in the U.S. are some of the fastest-growing in the economy. In 2018, they raised $12.4 billion USD in venture funding. Forbes says these were the six of the top fintech companies in the United States as of April 2019: Ripple, SoFi, Credit Karma, Plaid, Robinhood, Coinbase, and Stripe.
Fintechs are — or hope to be — nimble and responsive disruptors of the traditional banking industry and inheritors of opportunities that arose from the loss of trust in legacy financial institutions following the 2008 Global Financial Crisis.
While they aren’t banks, they provide services akin to banks or at least need to be able to work with banks to move money around. How? They do it through two systems and one fundamental set of technologies: Open Banking. Banking-as-a-Service (BaaS), and APIs.
Open banking involves banks opening their systems to allow third parties access to their data. Investopedia describes open banking like this:
“Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions.”
In theory, open banking will force legacy banks to compete with newer entities with the promise of lower costs, better technology, and better customer service.
The UK is a leader in open banking innovation, but countries worldwide are introducing open banking regulations. In the U.S. as of August 2019, many banks have formed independent groups that are exploring open banking.
BaaS allows fintechs to access and connect with banks’ systems so they can build bank-like services for their clients. How does that happen? A fintech interested in developing a new financial service by building upon legacy banks’ transactions and data will pay a fee to access a BaaS platform.
“Fintechs are — or hope to be — nimble and responsive disruptors of the traditional banking industry.”
On that BaaS platform, the fintech gains access to the banks’ systems and information. The banks provide more financial transparency options for account holders and form their relationship with the fintech and its services and community.
Here are a few of many companies that provide BaaS platforms for fintech innovators:
- Bankable, who recently partnered with VISA accelerate its digital banking solutions
- Treezor, a “one-stop-shop payment solution” for receiving and issuing payments
- solarisBank, which calls itself a “tech company with a banking license”
- ClearBank, a “bank for banks” that does not provide services to consumers, but only empowers fintechs to build their own solutions
- Fidor Bank, which also offers retail banking services
Fintechs go to BaaS service providers with their own digital banking concept. The BaaS service provider provides the foundation for a building that service with access to the regulated banking industry’s data and networks. One such BaaS service provider, Fidor, describes their BaaS services this way:
“Bank-as-a-Service by Fidor is the perfect solution for challenger banks that want to leverage the power of the cloud to go to market faster — no waiting time for a banking license, no hassle with AML or regulatory compliance…You simply build your customer experience on top of our APIs.”
Fintechs develop innovative banking solutions in conjunction with BaaS service providers by creating APIs, or Application Development Interfaces.
Think of APIs as the translator between two politicians who don’t share a common language. It’s the intermediary that allows two systems — the fintech and the bank — to interact.
APIs aren’t as obscure and rare as they might seem. Every time you use a smartphone app or send a Facebook message, you’re using an API.
The financial industry is ripe for innovation, and there’s no shortage of innovators in the economic and technology arenas. There’s no knowing what the future might hold as those finance and technology innovators continue to work together.
A deeper dive — Related reading from the 101:
Financial technology companies are disrupting traditional banking services and relationships.
Banking online has its own set of risks. But they’re manageable.