The banking industry as a whole is undergoing a digital transformation, challenging the supremacy of established banks that have been at the heart of the global financial system for decades. To stay relevant, those established banks must start thinking and acting more like innovative, agile fintechs and challenger banks.
Implementing new technologies is a logical start, but what banks truly need is an entirely new operating model. We call that new model Banking as a Service (BaaS). Back in late 2020, when I last discussed BaaS on this blog, it was still a nascent concept. There were a few examples of BaaS in action, but overall, it was much more promise than reality.
Now, things are different. The shift away from legacy banking processes toward BaaS is well underway, and that shift will only continue to accelerate going forward. Banks are already experiencing many benefits from BaaS adoption, including new revenue streams, higher customer acquisition and retention, and greater business agility and cost-efficiency. In contrast, banks that aren’t capitalizing on BaaS are increasingly at risk of being marginalized and left behind by their more digital-savvy competitors.
BaaS exposes banks to supply chain models they haven’t operated in before, including B2B2B and even B2B2C. These new supply chains models are highly interconnected; to successfully apply them, banks need IT infrastructure that’s agile, instant and intelligent. For established banks that have spent many years investing in a more siloed, traditional approach to IT, making this shift may be easier said than done.
What is Banking as a Service?
BaaS is a new business model that involves non-banking brands embedding financial services into their customer experience, selecting those services from a modularized, API-driven banking stack. A BaaS business model can help both banks and their partners reach more customers quicker, and in more innovative ways. There are several different approaches to BaaS:
- White-label banking.
- Platform banking.
- Open banking.
White-label banking is when a third party offers customer-facing financial services under its own branding, with the help of a banking partner. This arrangement can be beneficial for both partners: the bank can expand its reach to a much wider pool of potential end users, while the non-bank partner can offer financial services without the difficult and time-consuming process of acquiring a banking license.
While white-label banking allows many partners to offer financial services from the same bank, platform banking is essentially the inverse: one bank offering services from many different partners. In this case, the partners benefit from easy access to a wider base of potential customers. In turn, the bank can offer a better customer experience through a wider range of services, all accessed from the same bank account. Examples of potential platform banking services include crowdfunding, peer-to-peer payments, insurance, and wealth management.
Open banking is technically not BaaS in the true meaning of the term, but it does make sense to mention them both in the same context. Like BaaS, open banking involves a collaboration between a bank and third-party partners via an API platform. However, rather than directly acquiring banking services to offer end users—as in the case of white-label banking—partners in an open-banking model use the API platform to access valuable customer data, which they can then use to develop their own targeted products and services.
Why established banks need BaaS
In the past, banks developed products within the silos of their IT infrastructure. This created several drawbacks: for one thing, it typically took months or even years for banks to develop and release a new product. This meant the banks weren’t able to respond quickly to shifts in the market or rapidly changing consumer preferences.
In addition, banks couldn’t communicate or collaborate across silos, which directly contributed to a negative user experience. If a customer wanted multiple services from the same bank—for instance, a savings account and a mortgage—they’d need to complete a separate application for each service, even if both applications asked for the same information. It doesn’t take a business degree to see that making it difficult for existing customers to buy additional services is less than ideal.
Finally, there’s the simple fact that many banks are struggling to add new customers during a time of slow growth and increased competition. Banks that only sell traditional banking products via traditional channels exacerbate this issue, since they’re only competing for a small slice of the overall financial services pie.
Taken separately, each of these problems would be easy enough for banks to ignore—especially back when they didn’t have any better options. Now, at a time when many of their competitors have already begun to leverage BaaS to its full potential, banks that continue to ignore these issues do so at their own risk.
What does it take to do BaaS right?
Banks have traditionally relied on IT infrastructure that was never intended to enable open partner collaboration. Taking advantage of a new and different business model requires banks to take a new and different approach to digital infrastructure.
Moving infrastructure to the cloud and the digital edge is a key component of that new approach; in addition to getting closer to potential BaaS partners and end users, migrating to cloud-based infrastructure also helps banks increase flexibility, lower costs and modernize processes to enable future success.
Most banks that achieve success with BaaS do so using a hybrid multicloud approach, with compute, storage and services spread across on-premises, private cloud and public cloud environments. This gives banks the flexibility to modernize certain processes on the cloud, while also maintaining certain other processes on on-premises systems and servers. As a result, banks can begin addressing the shortcomings of their legacy infrastructure in an incremental fashion, rather than abandoning it outright.
To be successful with hybrid multicloud for BaaS, banks need to be able to get data to partners and service providers with speed, reliability and scalability. They also need to reach those partners no matter where in the world they’re located. This is where a carrier-neutral colocation partner such as Equinix can help.
Our 240 Equinix IBX® data centers in 70 markets across six continents give banks the geographic reach they need to be successful in an increasingly global economy. Equinix Fabric™, our software-defined interconnection solution, can give banks the private, dedicated connectivity they need—from wherever they are, to wherever their partners are. Finally, the Equinix partner ecosystem includes more than 3,000 cloud and IT services providers, ensuring that banks will always be able to take advantage of low-latency connectivity to the providers of their choice.
To learn more about Banking as a Service, the role it will play in the future of finance, and what Equinix can do to help enable it, read the white paper “The future role of banks”.