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Banks versus Banking as a Service (BaaS); why is there a difference and is any difference important?

Craig Lawrance


cl sep 20

There is a lot of encouraging news surfacing about what a banks’ modern branch office should look like? How does one bank differentiate itself from another? Does is go down the path of Capital One, for instance, that combines the local coffee shop with a branch office. On a corner in Boulder’s famous Pearl Street Mall, the Capital One branch office is a combination of Peet’s Coffee and the bank where the branch manager calls himself the Café Master.

Perhaps a modern branch office doesn’t exist at all. Perhaps it’s fully virtual and in all likelihood, what Apple is doing in offering the Apple Card, is changing the value proposition of banking in that there’s no branch offices. And yet, there’s no question it’s modern and it’s a bank. According to ZDNet publication:

Apple has become a bank. With the Apple Card, the company may have just found its next big thing and it isn’t a phone, computer, or tablet. And it certainly isn’t a subscription service. By putting itself in the middle of consumer spending and finance, Apple may have just solved its growth equation

It’s not surprising to see a technology vendor like Apple be recognised as a bank in the same way as banks are being recognised as technology purveyors. A bank these days consists of 95% IT and 5% Banking License. And the bank wants control over that 95%. Which now begs the all-important question and one many financial institutions running NonStop openly raise – why would a bank (wanting that much control) ever depend for its entire existence on an outside supplier?

They may want a better Core Banking system, or a better Loans Management system, or a better clearing interface. But arguably, these are all small components of a total banking operation. And yet they do and this market remains a volatile environment as its technology vendors who are adding functionality at a rapid pace. Technology that any modern bank would find very hard to replicate!

Banks need IT suppliers because they need to get to market quickly, cannot wait for too long to develop their own solutions, ideally want a tried and tested product, and because they have to evolve to compete, they still need IT companies to help them on their way. It’s as simple as that and this rotation between even similar product offerings will continue as banks look to optimize their operation while reaching out to an ever-more sophisticated market.

What is Banking as a Service (BaaS)? Are a portfolio of APIs sufficient to give yourself the label “Banking as a Service”?  Or is it just a banking service?    Take for instance the UK’s Clear.Bank that promotes itself as a provider of BaaS with offerings that are account focused as well as interfaces to payments schemes. Is this a bank?  For most financial industry advisors, it is a bank as they provide APIs to enable banks and building societies to experience a better, daresay more modern, clearing experience.  They are registered as a UK clearing bank, are entirely cloud-based, but given that clearing is but one component of a fully functioning bank, they provide a single delineated service to other banks.

Then again, there is a huge temptation for even the biggest bank to turn to an organization offering BaaS that overlaps the banks current product offering and essentially outsourcing all of its IT. Banks can move to BaaS just as those IT organizations offering BaaS may become banks but it’s not clear who will win out in the end. IT offering BaaS can focus solely on technology and not be impacted by the overhead that’s associated with being a bank. When it comes to calling oneself a bank and indeed one that is transitioning to the more modern approach of offering BaaS, one financial blogger posted:

“This nuance may not be obvious to the average person, but a company cannot use bank in their title unless they are a fully licensed bank.

“Now, some firms may become banks over time and still keep cool names, but the delineation and differentiation between BaaS and APIs is clear.

“In fact, the true providers of BaaS are either offering core bank processes as APIs with a full bank license, or integrating Stripe, Truelayer, Codat and Form3 to offer BaaS under a full bank license. This is why it is Banking-as-a-Service and not ABitofBanking-as-a-Service.

How are banks able to turn a profit in today’s climate of 0% interest rates? Banks are so heavily regulated by the FCA in the UK that their hands are tied making it harder to make money.  Covid 19 has thrown a spanner in the works with mortgage holders being offered payment holidays; there are fears that many may default as unemployment rises, banks have also raised their deposit requirements for mortgages; 20% is a typical minimum now.  UK Banks don’t charge monthly fees for consumer banking. Merchant banking takes all the strain. The digital-first banks on the other hand, like Starling Bank (Welcome to Banking-as-a-Service), who argue strongly in favour of the API Economy are growing fast. But they do have bank in their name.

However, turning to go with a financial institution that promotes itself as supporting solely BaaS is not without some risk. To some extent, there are limits to how quickly BaaS will take off because outsourcing your entire banking IT to a single supplier means you no longer have a distinct business. Open Banking and APIs are a necessary ticket for being in the game.  As are faster payments, e-commerce gateway. Clients want to see you can offer them a full range of what they may need. They increasingly also want to know they can personalise their own solution themselves, they are not happy to be dependent on an outside supplier for everything; they want control.

For the financial services companies that have turned to NonStop for processing of financial transactions, there will be some competition over where a line is drawn between turning to BaaS and retaining IT awareness over systems and platforms that ensure the bank continues to operate, satisfying the regulators and meeting mandates. With virtual NonStop becoming available, there is also the option of deploying transaction processing within a private cloud that’s on-prem and where APIs provided by those offering BaaS can be exploited to the benefit of the bank. Banking may be changing rapidly and be capitalizing on new ways to provide services even as their customers turn to new ways to interact – in a café using their smartphone as was evident inside the combined Capital One / Peet’s Coffee branch office.

Ultimately, it may come down to what we are now seeing taking place across families here in the UK. It could be very well that it’s around the dinner table that we see the convergence of banks and BaaS. I can’t remember the last time I or my 2 sons ever went to a bank at all. They are like the electricity company, when was the last time they visited that? Banking comes to our family like electricity. We no longer have to go to the banks for anything because the phone not only offers the power of banks in our hands but also offers access to credit services, money transfer apps, forex apps, multiple currency card apps.  It’s all in your hand these days.

And yes, can I have a latte to go?