Banking as a Platform (BaaP) is an emerging concept post the advent of Fintech. The idea revolves around the practical usage of Fintech or Banking applications and their interoperability on a platform to redefine the customer experience with the use of technology.
Exploring Banking as a Platform (BaaP) Model by David Brear and Pascal Bouvier is a good place to start to this discussion. The piece analyses why financial services did not organise as a platform and what will be needed to make platform play possible. In this piece, I will attempt to operationalise (or implement) BaaP as a concept and discuss how the change could come about.
What is Banking as a Platform? Simplistically put, if a smart phone were a Bank, it would be the most practical example of Banking as a Platform. The Bank or Banking infrastructure is your smartphone, which a customer chooses and it comes with its own set of of applications. Other financial services providers may choose the platform to build applications and the customer then has a choice to use those applications too.
Is there an example of this already available? Yes, PSD2, brings some of these elements together. An example, Third-party account access enables aggregation of customer payment account information. So, if we were to operationalise BaaP concept how would it look?
Take any bank they have two client segments. B2C and B2B. If a bank chose to become a platform they could have their offerings as applications for each product offering. A typical product suite could include – Current account, Savings account, Payment services, Debit Cards, Credit Cards, Investment services, Mortgages and Loans, Insurance and Wealth management. If these are ‘domestic apps’ of the platform brand the extension of the platform could include apps from different brands and provide customers the choice of offerings.
Easy enough? No, not that simple, not as yet. According to BCG in 2006 Global Retail Banking Revenue was circa $1.22 trillion, which is 57% of the total banking revenue pool. Lending (mortgages and loans) is 56% of total retail banking pool, Deposits 15% and Investments 24%. The dominance of mortgage/loans revenues indicates the power a platform BaaP (incumbent Bank) can wield. The critical element is attracting customers for the 44% of the revenue as Fintech footprint in this space is strengthening.
Who pays for running the BaaP stack? How is the lead generation tackled? How does the fair competition model work? How is personal data and behaviour shared? Who owns the customer on the BaaP platform? How is CRM model managed? Does the domestic regulator set the AML/KYC standards? Some questions to ponder.
When it comes to owning the BaaP stack, question arises, who will own the Balance Sheet? Are we looking at cross-pollination of the business models?
The B2B or the Institutional space has its own nuances. From the IPO process to Settlements the BaaP model can be used across Asset Managers, Insurance providers and Exchanges with effectiveness. Distributed Ledger and Blockchain have a role to play but more importantly the risk and liquidity management aspects of the institutional businesses can find efficiency and automation.
The BaaP model in the B2B space becomes a competency and data management play. The application environment opens up options to boutiques and encourages specialists to participate in the relay race where services can be sequenced.
Stock Exchanges, CCPs, CSDs critical to the institutional model will either become critical to BaaP model or will be challenged. The fintech players enable instant data and if they have access to BaaP stack, interoperability will be a thing of past and we may witness ecosystems of BaaP catering to domestic market regulations.
There are a three key challenges that await the BaaP model at this early stage:.
i) Data security and data sharing – governance and compliance rules
ii) Cultural changes in the incumbent BaaP organisation (aptly highlighted by Brear-Bouvier)
iii) Commercial model that will enable a level playing field for Fintech
Implementation of BaaP model is not about technology usage but instead about adoption and democratisation. We are at a juncture where the change is inevitable. Banks and Financial Institutions have a lot of depth and plenty of processes and can lead the charge towards change. Some already have, this is a blue sky, the change can come from unknown quarters Investment funds with ecosystems or Banks, who will take the leap of faith?