As previously noted, the transition to a banking-as-a-service model is a tall order. It requires planning, innovative thinking and even an appetite for risk, particularly when banks consider opening up access to their capabilities and assets to trusted technology partners.
But leading banks, both traditional and digital natives, are already investing in the digital revolution. We recommend the following to facilitate a successful transformation:
Identify “as a service” capabilities. To identify optimal candidates, banks must first define their specific goal, whether it’s enhancing customer service, monetization and revenue growth, or gaining first-mover advantage. To achieve the latter, a large private bank in India is partnering with a Singapore-based fin-tech company to offer virtual card and remittance services to customers, something other area banks have yet to release. Similarly, Fidor partnered with Currency Cloud to become the first bank to offer a regulated e-wallet that allows customers to buy currency, make payments and view balances in a wide array of currencies.
Form interactive partnerships. Despite the many benefits BaaS has to offer, adoption is still in its infancy, as many banks are unwilling to lose control of the customer. The inherent risk of banks transforming into a back-office service provider and allowing fin-techs to control customer interactions is very real. Banks face a conundrum: If they don’t embrace BaaS, they lose to new technology insurgents, and if they do adopt BaaS, they risk losing complete ownership of the customer experience. The answer lies in effectively developing beneficial partnerships. Banks need to ensure that third-party partnerships do not result in a fragmented customer experience, and they need to structure the partnership so that APIs equally benefit the bank and the fin-tech provider, including cross selling, co-branding and shared marketing opportunities. See below for an example of how banks can leverage partnerships and commercialize their data based on different relationships.
Consider new pricing models. For best-in-class bank monetization, banks should use a hybrid model, in which APIs and services are individually tagged to the highest ROI method. For example, end-users can pay transaction fees to use the solution; partners and/or developers can pay for service/data usage; and partners and banks can enter into a revenue-sharing agreement, such as pay-per click advertising. To succeed, these monetization approaches should provide easy access to APIs, comprehensive security features and multi-tier access controls.
Foster IT innovation over keeping the lights on. In addition to implementing APIs, the technology strategy should also focus on agile API development, continuous API design opportunities and ongoing API acquisition, transformation and data quality management. This can be a challenge, particularly at banks where IT is still considered a functional utility rather than an enabler of competitive advantage. The bank’s culture should value the latter over the former.
Champion change management. To infuse digital innovation throughout the bank, organizations will need sustained commitment and engagement from senior leadership. Because this is not a quarterly or even an annual initiative, success demands effective change management, including:
Educating and selling all stakeholders on the reasoning, benefits and importance of BaaS.
Communicating and inspiring stakeholders throughout the transition. There is no such thing as “too much communication.”
Training your organization and partners on the specific skills needed to deploy an effective BaaS campaign.
As a first step toward BaaS enablement, we suggest a structured, three-step approach to define a best practice strategy and API roadmap: Understand the current-state bank vision, direction and capabilities; design the target state for banking as a service; and develop the change roadmap and implementation plan. Based on our industry experience with numerous client engagements, a comprehensive understanding of current IT capabilities and change management are both crucial.
Regardless of your organization’s BaaS posture, the impact of this movement will only grow as banks work overtime to address shifting consumer needs and outmaneuver the competition — both traditional players and insurgents. To stay digitally relevant, banks will need to embrace the virtues of BaaS.