Open Banking vs Banking-as-a-Service

If you aren't too close to this space, you may have a little confusion about what the difference is between Open Banking and Banking-as-a-Service (BAAS). So I'm going to spend a little time to hopefully provide a little clarity.

Open Banking is method where non financial companies can provide value add financial services to a consumer, with the goal of increasing portability of consumer's financial data.

Companies offering services such as bill pay , credit marketplaces, underwriting , personal financial tools (like mint.com) can leverage APIs, to access consumer financial information, combine it with other data, and provide analytics, access, or other value added insights and capabilities.

Open banking can also enable real-time payment settlement, by eliminating the gap between payment and settlement, which companies love because it can reduce administrative costs related to payment transactions. More than 2.5MM people use open banking today to "move, manage, and make the most out of their money today (https://www.openbanking.org.uk/news/three-years-since-psd2-marked-the-start-of-open-banking-the-uk-has-built-a-world-leading-ecosystem/ )

Use case: Most people think of the mortgage application process as a bear. There are dozens of documents required to apply for a loan, and the paperwork is cumbersome (and environmentally unfriendly!), but by leveraging open banking APIs, this process can be transformed. For example, Swedish Bank SBAB teamed up with Tink, leveraging Open Banking APIs, to created a "Mortgage Match" app to enable consumers to quickly compare and switch mortgages, with the result of 80% of users getting a better interest rate. (https://tink.com/blog/use-cases/sbab-use-case/)

Banking-as-a-Service (BAAS) on the other hand is specifically directed at FinTech's who are building financial services for consumers, by helping them deliver services or augment their suite of offerings.

We are experiencing the digital revolution with the next generation of customers expecting a much more streamlined digital experience, and immediacy of transactions. Many new entrants have jumped into the FinTech space to meet these needs, offering great user experiences on modern infrastruture.

These FinTechs face the complexities of acquiring bank charters and money movement licenses as part of their entry into the the highly regulated and complex Banking industry. By leveraging BAAS providers, they can expedite their entrance into the marketplace, or if they already have a presence, they can augment the financial services they offer to their customers.

For example, companies like Uber can open their own bank as a benefit for their employees, and embed it in their existing app infrastructure, and offer financial features like a deposit account that enables them to have early access to driver wages.

While the concept for BAAS is exciting and can change the future of banking, there are still some hurdles to get over. Financial service offerings have been around for a long time, and people take for granted the safety and security inherent in our current infrastructure and payment flows. Consumers don't have to worry about all the things that could potentially go wrong - whether or not their payment transaction will go through, or what do do if there is fraud, or if they want to get a refund on returned merchandise, a business worrying about a check with insufficient funds. All these elements have to be built out in a BAAS environment, and they may or not be there. It cost money to build and deliver these services, and if the feature can't be monetized, it might not be delivered.

Some of the key elements that BAAS providers (should) offer:

• Thought leadership - guidance on best prices for user journey and security

• Flexibility - modular construction so that FinTech can choose the features most needed

• Turnkey experiences - seamless integration, and easy deployments

• Reliable infrastructure - 99.99999% availability, transparency to transactions, technical and customer support, regulatory adherence, etc

• Security - making sure that you can reliably identify the end user

• Connectivity & network - ability to integrate to other value add service providers that enhance user experience and make them more sticky

These offerings are impacted by regulatory requirements, but are evolving over time. Elements like cloud technologies and addition of new capabilities like real-timepayments.

the ultimate goal of these capabilities is to offer convenience to the end user. What these capabilities and offerings look like will vary significantly by use case and market. Looking forward to seeing how this space continues to evolve over the next 5 years.

#openbanking #BAAS #BankingAsAService #RealTimePayments #FinTech