November 1 2021:The effectiveness of Banking-as-a-Service driven by its collaborative nature has made it extremely popular in the global banking ecosystem, as evident from the current industry’s valuation of $1 trillion.
A whitepaper on BaaS has been released by leading payment and API* banking solutions company, Cashfree. The paper highlights that:
BaaS is driving the transformation in the financial industry: With banks opening their APIs, a new ecosystem of players is being created, including fintech companies, platform players, aggregators and others which directly provide the services to the customers, API aggregators and API stack players providing the infrastructure for the partnerships required, and related service providers like KYC and identity verification.
Enabling the next phase of digitization: The use of APIs introduced the next phase of digitisation, after the initial internet-driven changes to banking. While private and partner APIs allowed banks to streamline and optimise internal processes, public APIs allowed them to unlock the potential of their services and their data, resulting in the unbundling of banking services.
BaaS with respect to India: India has adopted a hybrid approach, including both private BaaS enabled by bank provided APIs, and public digital infrastructure like IndiaStack allowing any party to provide BaaS services. In addition, there is open banking enabled via regulation, via the Account Aggregator framework. The higher degree of integrations have reduced costs and induce scalability to service new customer segments, geographies and novel use-cases easier. This allows companies to focus on the customer and their products/service offerings, leaving the building, maintenance, security and scalability of the infrastructure to the intermediaries.
Way forward and potential of BaaS in the evolved scenario: Technological progress has created a number of players with an existing pool of individual and business customers, be it B2B marketplaces, big tech companies, e-commerce companies, aggregators, etc. APIs now allow any such customer touch-point to be converted into a point of access for financial services.
Evolved Revenue models: The ongoing commoditization and sachetisation of banking services has enabled numerous new business opportunities and a change in business strategy, for not just the third parties but also the banks themselves.
Regulatory purview: The recently released RBI’s Digital Payments Security Controls have essentially been encouraging by addressing concerns related to banks’ requirements to resolve issues from the core, and become more tech savvy and secure. This, in turn, encourages banks to open their APIs to third parties, while easing and securing the API based service landscape as a whole.
Conclusion: banking will influence the next wave of transformation in BFSI industry
*API is the acronym for Application Programming Interface, which is a software intermediary that allows two applications to talk to each other.