Banking-as-a-Service (hereinafter referred to as “Baas”) describes the unbundling of banking infrastructure and the ability to have access via Application Programming Interfaces (hereinafter referred to as “APIs”) to specific banking functions.
These APIs, with the information they provide, can be utilized by FinTechs or any other third-party developers running a digital platform to build new consumer-friendly and enterprise-friendly financial solutions.
With the BaaS approach, banks provide financial services through applications built on top of their APIs. The popularity of BaaS is based on the ease it provides to business establishments and consumers in order to reap the benefits of modern banking. Also, all of this is at the user’s disposal without having to physically engage with a bank.
One of the daily use instances would be Cab/ transport service applications such as Uber, Ola, Rapido, etc. Today, there is a possibility for a non-banking business, such as these cab companies, to offer digital banking services such as online payments without acquiring a banking license.
The bank’s system communicates with the cab/ transport service company via APIs and webhooks, making their customers’ accounts directly accessible via the cab company’s website or app. Rather than acting as a middleman between the customer and their financial institution, the cab company is merely an intermediary, meaning it is not burdened by any of the regulatory duties of a bank.
HOW DOES BaaS WORK?
APIs are the building blocks of a digital banking core framework. They assemble into logical groupings that can be used to build functions such as creating and setting up accounts, withdrawals, deposits, and loans.
The Breakdown of the Three-Tier, API-based banking-as-a-service stack:
1. The bottom level is a traditional, nationally licensed financial institution (mostly, a bank) that collaborates with the BaaS provider, commonly known as the “Infrastructure-as-a-Service (hereinafter abbreviated as “IaaS”)”
2. The “Banking-as-a-Service layer” in the middle depicts banking services that have been tailored as an environment for FinTech startups and other businesses to deliver products to end consumers. This stack element acts as a mediator between the bank and the FinTech Company, sending data back and forth through the BaaS provider.
3. The topmost layer is the FinTech company that receives data from customers about their transactions. It then shares that information with third-party BaaS providers. The BaaS providers, in turn, pass along the information to the FinTech layer received from the banks.
COLLABORATIONS BASED ON BAAS MODEL:
1. To provide vehicle finance to the drivers with the Uber Vehicle Financing Program for which Uber and State Bank of India (hereinafter referred to as “SBI”) partnered together. This has made it possible for drivers to get easy and affordable loans for owning a car. For this purpose SBI inked a pact with Uber for instant vehicle finance.
These loans are sanctioned with the help of digital offerings and in turn, help to overcome liquidity crunch and skip excessive documentation requirements.
2. To simplify digital merchant onboarding and payment solutions, Razorpay got in collaboration with Ratnakar Bank Limited (hereinafter referred to as “RBL Bank”) to make it happen. Razorpay rolled out corporate credit cards to target small and mid-size enterprises (hereinafter referred to as “SMEs”) and start-up firms. These credit cards aid SMEs in solving small-term financial issues such as financial reconciliation, access to credit, etc.
3. E-commerce giants like Amazon, and Food- commerce giants like Zomato and Swiggy, can now provide instant refunds by partnering with Yes Bank. The digital solution offered by the Bank facilitates real-time processing of refunds directly from the respective corporate giant’s Enterprise resource planning(ERP). This collaboration has proved a significant reduction in the turnaround time in the refund cycle.
Recently, the pandemic has played an important role in boosting the Fintech industry. It has forced people to make a cashless transactions which in return forced people to adapt Fintech platforms for making the transaction without causing any hassle to them. Earlier, people were forced to visit the Bank to get anything done whether it is making a transaction from your account to another account, or to get you KYC done, but as of now, people can do all these tasks simply by sitting in their homes, offices, hotels, etc. with help of Baas, Fintech services, which helps people in making the transaction at their ease and that too within seconds. And now banks even provide E-KYC/Video KYC, and a customer can open their Bank accounts online without visiting the Branches physically.
HOW IT IS TRANSFORMING THE FINANCIAL LANDSCAPE OF INDIA
Advanced Self-Service Capabilities
Earlier people used to wait for long hours in queues at banks to get their Issues resolved but, as on date, most of the issues can be solved by using the respective App of the Bank in which they have their account.
For instance, SBI has a YONO app, whereas Punjab National Bank (PNB) has developed PNB ONE app; where you can solve all your issues and these services are not only limited to basics like checking account balances online but also one can opt for loans and buy insurance digitally.
Application Programming Interfaces (APIs)
A decade ago, the Reserve Bank of India (hereinafter abbreviated as “RBI”) introduced National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS), followed by the National Payments Corporation of India (NPCI) introducing Immediate Payment Service (IMPS). This was followed by API-led banking.
For banks to perform functions digitally and seamlessly, it is imperative to integrate their products and services with various third parties. The APIs act as the communicator in the middle to link the two. Therefore, an API is a bridge that helps banks and third parties to connect safely and leverage each other’s offerings in real-time.
An interesting example would be the money transfer requests sent by mobile wallets and received by banks during a transaction, hence providing a low-effort and faster experience to the end-user. Applying for a business loan, checking credit score, and viewing balances all in one place, have been made possible due to APIs.
They allow banks and third-party companies to augment their strengths and complement each other, to provide great features and services to the customer in a better way than when they did it by themselves.
The majority of the Indian Population still relies on cash-based transactions. But very recently Unified Payments Interface (hereinafter referred to as “UPI”) transactions, mobile banking has tremendously increased, and also the demonetization also led the people to adopt these payment methods.
The Central Government has also been providing incentives in terms of cashback to people for using Fintech solutions to make cashless transactions as of now it is only a matter of a second to transfer the money from one account to another account.
Due to the adoption of fintech, numerous banks have introduced their own Artificial Intelligence (hereinafter abbreviated as “AI”) chatbots for client relationship management. The conventional chatbot system was replaced with this one. These intelligent solutions are created in a way that uses speech recognition and natural language processing to help and support clients.
Neobanks are basically digital Banks without physical offices. They provide a wide area of banking and financial services such as instant loans, mutual funds, savings accounts, fixed deposits, and lending products, including other services too, which can be easily accessed online; through the website or a dedicated app in association with other licensed banks. This trend got in during the pandemic when consumers were looking for digital ways to bank.
Banks will need to concentrate on preventing commoditization as BaaS adoption increases. Since end users won’t be aware of which banking API is being used in the backend, as a result, they will develop a preference for the service provider rather than the financial institution that made it possible.
Therefore, developing an open banking API environment is simply the beginning and not the end. Every financial provider’s business demands should be catered to in BaaS services.
An alternative to an API marketplace is a white label end-to-end financial solution where the bank owns the data. Another option is to co-brand the entire solution, as with the co-branded RBL-Bajaj Finserv Credit Cards or the remittance services offered by TransferWise to several neo-banks.
BaaS will make it more important than ever for banks to plan where to use their own services and where partner ecosystems can be utilised. Additionally, the structure of the annual budget and the sales targets must be evaluated.
In order to build the correct strategy supported by enough investment and a partner ecosystem and to outperform the competition, banking leadership must embrace better technology awareness and decision-making. It’s fascinating to see how technologically empowered ecosystems are reshaping the age-old industry of banking.
– Team AMLEGALS, Assisted by Mr. Yogendra Pal (Intern)
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