Banking-As-A-Service’s Secret Sauce

Remember that old term “banker’s hours?”

That term, which fairly or unfairly suggested that banks were centers of slow-moving progress and relatively easy professional work, is long gone. Indeed, banks represent a significant and necessarily vital part of the massive changes taking place all around the world in financial services and payments — moves that are happening at increasing, even real-time, speeds. They are more often bound together with their business clients, as well as other consumers and players, via the world of FinTech. Banks are now at the center of some of the world’s most exciting and vital innovations and disruptions — new ecosystems are being created as technology progresses and consumer habits evolve.

Banking As A Service

Those changes have given rise to the banking as a service (BaaS) concept, which — as Anabel Perez, NovoPayment CEO and co-founder, told Karen Webster — is finally coming of age. Banking as a service, as Perez defines it, serves as a software platform that connects financial institutions (FIs) to a variety of innovators with value-added services that help them acquire and retain new customers via new and evolving use cases. Application programming interfaces (APIs) simplify that access for banks and for FinTechs that want their innovations to reach their customers.

It is an idea whose time has come, Perez told Webster — FIs and FinTechs need each other, but for different reasons. FinTechs often need regulated entities for the innovative use cases that solve particular financial and payment frictions for people and businesses. FIs need innovative solutions for those same reasons, but they often lack the teams, infrastructure and resources to develop solutions and get them to market in a relevant timeframe. Perez cited cross-border use cases as an example — a critical payments capability that is relevant everywhere, but especially in the Americas, where NovoPayment’s primary focus lies.

But as banking evolves to take on some of these newer roles, there are also deeper trends and questions at play.

At issue for banks all over the world in this new decade is whether those legacy financial institutions can move as fast as their upstart competitors. FIs may find it challenging to match the offerings of those challenger banks. “Traditional banking providers cannot accommodate all of their own [customers’] needs,” Perez told Webster. “It would take years to deliver and millions of dollars [in investments].”

That means an increasing need for FinTechs, and an increasingly vital role for them to fill when it comes to payments and financial services innovation. “We can provide better, cheaper and faster services,” Perez said. Her company’s role, she said, is to provide the place where other FinTechs and banks get together.

Legacy Concerns

Perez acknowledged that legacy financial institutions using banking-as-a-service platforms to absorb APIs is one piece of the overall landscape. One of the bigger questions in this wider area is how well they can use the same platforms to create and deploy their own APIs to enable others to develop new and innovative financial and payment-related use cases.

That question came into focus earlier this year thanks to a payments move from Visa. As PYMNTS has reported, the payment card network said it would buy Plaid, a company that focuses on the development of APIs that allow consumers to share their data with thousands of apps. The deal is reportedly worth some $5.3 billion. This move — just one of many — is a nod to the importance of data access and connectivity across traditional FIs and FinTech upstarts. In another example from late last year, The Clearing House released a template designed to help banks link with FinTech firms and connect to APIs.

“Because banks could not customize APIs [to enable that data access], FinTechs moved in with new solutions to reach customers and drive effective relationships with banks,” Perez said.

As for those API efforts in general, Webster asked Perez if banks are indeed moving as quickly as they need to. “We need to evolve faster,” Perez responded. “We need to be where the customers are.”