Digital banking has completely revolutionized the banking industry by offering the convenience, mobility, and flexibility of products and services that today’s modern consumers and small businesses have come to expect. Through advances in technology, essential banking functions — like depositing a check — no longer require a trip to a branch or a physical ATM and can be done on your mobile device.
"Fintechs are turning to BaaS to innovative power products driven by consumer demand"
The next iteration in digital banking is the concept of Banking-as-a-Service (BaaS). BaaS is the transmission of banking services through application programming interfaces (APIs). This provides fintechs and other non-bank companies with the ability to offer consumer and business banking products and services to their clients, without having a banking license themselves.
A Brief History of Digital Banking
If we think of banking transformation over the last 20+ years, we can identify three primary waves:
• 1990s – 2010: The digital banking phenomenon begins with online banking being built into personal finance software, the first online banking website is deployed, and the primary account aggregation software, gave consumers the ability to view all their accounts in one place. In 2005, the FFIEC announced rules and regulations for financial institutions to protect customers, and by 2009, 54 million households are accessing bank accounts online.
• 2010 – 2019: Following the global financial crisis, the adoption of online banking began to soar, with consumers hoping to reduce debt and increase savings as not to relive the economic strife of the Great Recession again. We sawthe rise and expansion of the mobile-first concept as iPhones and Google devices saturated the market offering mobile banking apps to handle all of your banking needs on the go — whether it’s depositing a check, turning a card on or off, instantly sending money to friends, or managing all your finances with a mobile personal financial management (PFM) tool.
• 2020 and beyond is going to see the proliferation of BaaS through APIs. BaaS is the concept of banks providing technology through APIs to fintechs and their customers who can then offer bank products to their end customer without having to be a bank themselves. The partnership between banks and fintech will only become stronger in the years to come. And consumers will benefit from this, having access to improved products, enhanced technology, and better customer experience.
The Future of Digital Banking
Fintechs are turning to BaaS to innovative power products driven by consumer demand. Banks are turning to BaaS to acquire new clients, monetize their technology, or both. Consumers want a seamless experience while handling their banking and financial needs, and BaaS can provide just that. By leveraging open source models, banks and fintechs can work together to give the customer with an improved experience.
BaaS is made possible through open APIs, which are pieces of code that integrate data between systems. Right now, APIs are primarily being created for two primary purposes: digital account opening (onboarding) and digital account management. Once a customer’s information is onboarded to the bank’s core system, you can extend the APIs to account management services, like viewing balances, transaction history, getting statements, making deposits, direct pay, person-to-person payments, and more. Because APIs are flexible and can be created for microservices —like payroll check balances — banks that provide BaaS are an ideal outlet for fintech products.
MaxMyInterest (Max), an intelligent cash management platform for investors and financial advisors, is a prime example of a non-bank that we (Radius Bank) partnered with that leverages our APIs to bring their clients’ rapid account opening technology. The partnership utilizes our BaaS to open and begin funding a high-interest savings account in less than one minute. Max clients can earn more on their deposits through our highly competitive yields while benefitting from more excellent aggregate FDIC insurance coverage, one-click funds transfers, and consolidated tax reporting.
To Partner, or Not to Partner? It shouldn’t be a question.
Partnerships between banks and fintechs or non-banks have competitive advantages. Fintechs get to leverage the banks’ core systems and technology without building their infrastructure. Banks can increase customer engagement and offer more services without investing in the resources to build out those products or marketing teams to reach desired target audiences.
But not all partnership models are the same. Some banks are opting to white-label their technology and operate as the back-end behind their partners. In this model, the bank holds the client data, but they become a backroom brand or silent partner. In many cases, the end-user doesn’t even know the bank is behind the product they’re using.
We favor a dual partnership model where both partners are culturally and strategically aligned and in which banks control their technology stack. That requires having the right financial and human capital in place around product development and compliance, having robust and agile technology, and vetting a potential partner carefully. We ask: Is the prospective partner in it for the short-term or the long-term? Are they a company, or a product? Do they have a sustainable business model? Do they have respect for the regulation and compliance environment in which we live?
As banks help power more and more fintechs, they’ll need to strategize their partnership goals and models. We believe it’s essential for banks to innovate continually, manage their technology, and acquire and engage customers. Expanding their capabilities into BaaS presents excellent opportunities to do just that.