The future of banking will be open and interconnected

The banking industry as a whole is undergoing a digital transformation, challenging the supremacy of established banks that for decades have been at the heart of the global financial system. To stay relevant, these established banks need to start thinking and acting more like innovative and agile fintechs and challenger banks.

Implementing new technologies is a logical start, but what banks really need is an entirely new operating model, which we call Banking as a Service (BaaS). At the end of 2020, it was still a nascent concept with few examples in action.

Now things are different. The transition from traditional banking processes to BaaS is well underway, and it will only accelerate. Banks are already reaping many benefits from adopting BaaS, including new revenue streams, increased customer acquisition and retention, and greater agility and profitability. On the other hand, banks that do not capitalize on BaaS are increasingly at risk of being marginalized and left behind by their more digitally savvy competitors.

BaaS exposes banks to new supply chain models, including B2B2B and even B2B2C. These models are strongly interconnected; To apply them successfully, banks need an agile, instantaneous and intelligent IT infrastructure. For established banks that have spent many years investing in a more siled traditional IT approach, making this change may be easier said than done.

What is banking as a service?

BaaS is a new business model that involves non-banking brands integrating financial services into their customer experience, selecting those services from a modularized, API-driven banking stack. A BaaS business model can help banks and their partners reach more customers faster and in more innovative ways. There are several different approaches to BaaS:

White label banking services

White label banking is when a third party offers financial services to customers under its own brand, with the help of a banking partner. This can be beneficial for both partners: the bank can extend its reach to a much wider pool of potential end users, while the non-bank partner can offer financial services without the long and difficult process of acquiring a banking license.

Banking platform

The banking platform is essentially the reverse of white label banking with a bank offering services from many different partners. In this case, partners benefit from easy access to a wider base of potential customers. In turn, the bank can provide a better customer experience through a wider range of services, all accessible from the same bank account. Examples of potential platform banking services include crowdfunding, peer-to-peer payments, insurance, and wealth management.

Open bank

Open banking is technically not BaaS in the proper sense of the word, but it makes sense to mention them both in the same context. Like BaaS, open banking involves collaboration between a bank and third-party partners through an API platform. However, rather than directly acquiring banking services to offer end users, as in the case of white label banking, partners in an open banking model use the API platform to access valuable customer data. , which they can then use to develop their own targeted services. products and services.

Why established banks need BaaS

Historically, banks developed products in the silos of their IT infrastructure, which meant that developing and bringing a new product to market could take months or even years, hampering banks’ ability to react quickly to changes. market or rapidly changing consumer preferences.

Additionally, banks could not communicate or collaborate across silos, resulting in a negative user experience. If a customer wanted multiple services from the same bank, such as a savings account and a mortgage, they had to complete a separate application for each service, even if both requested the same information. Inefficiencies like this, which prevent existing customers from purchasing additional services, are less than ideal.

Finally, the fact that many banks are struggling to add new customers during a period of slow growth and increased competition, where they only sell traditional banking products through traditional channels, exacerbates this problem, as they are not in competition for only a small slice of the overall financial services pie. .

Taken separately, each of these issues would be pretty easy to ignore, especially back when they didn’t have better options. Today, at a time when many have already begun to take full advantage of BaaS, banks that continue to ignore these issues do so at their peril.

What does it take to do BaaS properly?

Banks have traditionally relied on an IT infrastructure that was never designed to enable open collaboration between partners. Leveraging a new and different business model requires them to take a new and different approach to digital infrastructure.

Key to this is moving infrastructure to the cloud and the digital edge; in addition to getting closer to potential BaaS partners and end users, migrating to a cloud-based infrastructure increases flexibility, reduces costs, and modernizes processes.

Most banks that succeed with BaaS do so using a hybrid multicloud approach, with compute, storage, and services distributed across on-premises, private cloud, and public cloud environments. This provides the flexibility to modernize some processes on the cloud, while maintaining other processes on on-premises systems and servers. As a result, banks can start filling gaps in their existing infrastructure incrementally, rather than abandoning it altogether.

To succeed with hybrid multicloud for BaaS, banks must be able to deliver data to partners and service providers with speed, reliability, and scale. They must also reach these partners, wherever they are in the world. This is where a carrier-neutral colocation partner can contribute geographic reach to succeed in an increasingly global economy. Additionally, a software-defined interconnect solution can provide banks with the private, dedicated connectivity they need, wherever they are and wherever their partners are. Finally, a rich ecosystem of partners enables banks to take advantage of low-latency connectivity with the providers of their choice.