Ceaseless banking change - from all the angles
Everyone, it seems, wants to be a bank, and not just fintechs like Revolut. However, there are some barriers to entry when it comes to taking people's money - the most significant being that banks are highly regulated and to offer financial services you need to be licensed and maintain compliance at all times. This has in the past put a block on the ability of retail and other businesses to engage directly with their customers' wallets – something they are generally keen to do.
Traditionally, retailers have engaged with their customers' finances through loyalty programmes, branded credit cards and point-of-sale finance options. These are clunky, expensive, difficult to set up and even more difficult to maintain. Trying to set up your own banking operation has proved expensive and difficult, and the regulatory and compliance burden is considerable.
So, if Banking 1.0 was monolithic infrastructure, cash, cheques and a 0% finance deal at Sofas-R-Us, and Banking 2.0 was a funky app, some QR codes and Buy-Now-Pay-When-You-Can-Afford-It proposition, what does Banking 3.0 look like?
Based on current market offerings, Banking 3.0 is a bespoke and business branded financial services proposition delivered through user-friendly mobile and app-based channels which are embedded into existing customer experiences, and enabled by infinitely scalable cloud-based infrastructure. Critically, these "banking services" have regulatory air-cover provided by a fully regulated and authorised bank.
This is Banking-as-a-Service (BaaS).
The BaaS model usually involves a bank partnering with a technology provider which builds and maintain a platform interfacing with the bank's own payment and banking systems, so enabling a fully-fledged banking service. With this, an unauthorised business can quickly stand up a banking proposition for its customers that will manage on-boarding, KYC (Know Your Customer), current and deposit account capabilities and other financial products on an as needed basis.
As a result, businesses can quickly offer a range of fully compliant financial services to their customers while still retaining ownership of the end-to-end experience and, crucially, maintaining control of customer and transaction data. Meanwhile the bank and the tech provider create a new source of income for themselves, and the bank indirectly expands its market share. Each participant in the structure brings something of value to the collaboration.
The BaaS landscape is developing quickly and new banks such as Solarisbank, ClearBank, RailsBank and Starling Bank have been quick to leverage their infrastructure to promote BaaS and embedded finance propositions.
For some fintechs, such as Revolut, acquiring banking licences is the preferred route. (Revolut moves close to UK Banking Licence - March 2023).
Tech innovation (and particularly cloud based infrastructure) has fuelled a dramatic evolution in financial services in the last 10 years and BaaS is the logical next phase of that evolution. It combines the tech and innovation skills of fintechs in successfully disrupting distribution models and customer experience with the deep experience of banks in maintaining stable and compliant systems.
If you'd like to know more about our experience of advising on BaaS, please contact William James.