January 6, 2017  |    Leave a comment

While the idea of Banking-as-a-Service (BaaS) has been around for years, 2016 was really the tipping point in terms of wider understanding and public launching (or aspirations) of broader Baas platforms.

Singapore-based VC firm Life.SREDA is making an attempt to become the thought leader in BaaS topics (including owning the www.bank-as-a-service.com website). As part of their outreach, they published a good overview of their take on BaaS, with additional focus on the impact in Asia. The whitepaper is here, but below I offer a brief summary and highlights.

One easy way they explain the use case of BaaS for incumbent banks: BaaS is to banks as AWS is to Amazon (if you don’t know what AWS is, we have bigger problems than I can address here). AWS comprised 67% of Amazon’s profit in 2015, which may come as a surprise the average Amazon user. Amazon took an internal core competency and turned around and sold it as a service to others.

How might a bank turn around and provide banking as a service? One example cited in the paper is The Bancorp, which offers private label banking and payment solutions to non-bank and fintech companies. While most consumers have never heard of Bancorp, they support over 75 million prepaid cards in the US, and helped Simple get off the ground. I wrote about other banks behind fintech back in August.

Another example is Fidor, the German online bank who is helping Telefonica Germany launch a mobile banking offering. Fidor’s API modules include credit scoring and decisioning, digital front end templates, social network for customers, a “Loyalty Module,” developer portal, payments gateway, etc. The paper lists a few other examples as well.

However, for many banks, becoming a BaaS provider/platform will not be the answer. However, they can still benefit by being a customer of the BaaS platforms. In the value chain of a bank, there are many components that are required to be performed to have a fully-functioning and compliant bank, but that may not be providing any differentiated value to the customer.

One current area seeing a lot of interest is in the KYC space. I am not aware of any bank that has a competitive advantage due to their KYC process – most just use older off-the-shelf software. For functions like KYC, it makes perfect sense to plug into the latest and greatest API to automate much of the process.

There are plenty of areas in which banks could modernize their services, improve offerings, and lower costs using APIs from BaaS providers. However, the lack of action on the part of incumbents offers great opportunity for fintechs and startups to build new banks from scratch and aggregate the best solutions.

2017 should be an exciting year!