Banking as a service: a revolution in the interest of the client

With the rise of technology in the traditional financial system, for consumers, the term “banking” has taken on a new meaning. Unlike ever before, we are witnessing more and more consumers actively participating in day to day banking decisions. For example, it is now common to see retailers issuing loans at the point of sale, bills being paid on the utility company’s website and more and more credit cards being replaced by smartphones.

That is to say, banking now denotes a financial service desired by the client. Even though the client is selective about the place where he or she keeps their money, they do not care who provides the financial service, be that banks, phone companies, retailers, or internet providers. The market has adapted to the technological revolution and the growing needs of the consumer, causing a new model to emerge: Bank-as-a-Service.

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Banks and fintech: competition and cooperation

Technological development became the trigger for the rapid growth of fintech companies, encroaching upon the banks’ monopoly status. One of the first online banks was X.com, launched by Elon Musk in 1999. Slightly later, Musk joined the PayPal team, and together they completely upended the money transfer market, bringing it out of bank offices and onto the web.

Experts began to predict the impending death of banks. According to them, fintech was supposed to completely replace banks. Banks, in their turn, started experimenting with technologies, opening fintech labs and buying start-ups. But this approach soon turned out to be inefficient — why should each bank reinvent the wheel when wheels are freely available on the market? Furthermore , these innovations turned out to be too alien for traditional banks, rendered merely fashionable “features” in order to attract younger clients.

On the other hand, the market share available fintech and blockchain products is too small — measurable in fractions of a per cent — and in order to increase it, they have to partner up with banks. What is the solution? Fintech products have to end up in banks, as clients will be much happier to buy and consume innovative financial products under a familiar brand.

As a result, an understanding of what a productive business model for the cooperation between banks and fintech companies must be formed.

According to BANKEX CEO, Igor Khmel: “People have come to trust financial institutions, and it is important for them to have a physical place to turn, instead of just a website on the Internet that may be taken down at any moment. Therefore bank branch offices will remain (albeit fewer in number) as a token of trust in the system. Their role, however, will change fundamentally: branch offices, and banks as a whole, will become a point of sale for various financial services provided by fintech companies or partner banks,”

Banking-as-a-Service: a bank without a banking licence

That is how the Banking-as-a-Service (BaaS) concept came to be — as a business model allowing for the construction of new financial products, integrated with numerous existing technological solutions and deployable in various jurisdictions.

Chris Skinner calls this the “Lego bank” — enabling you to build a full-scale bank without having a banking licence, by using several APIs of different banks and fintech products of your choice. Would you like to collect an investment bank — please! A commercial bank? Be our guest! A retail bank? Nothing could be simpler. You just have to add some analytics to your set and you can start your business.

A bank built according to this model can be launched in a day and renewed every month — based on microservice architecture and using open-source software from the marketplace of banking technology.

Decentralized BaaS — the future of banking

With all of the advantages promised by the transformation of banking according to the BaaS model, we are still not seeing a client-oriented ecosystem. Why? Because the main stumbling block is the lack of trust.

Banks do not trust each other or tech companies. They are afraid to lose their client base by entering a partnership with a stronger or more technologically advanced player. They are afraid that their products will not be competitive in a close comparison against alternatives. They are afraid that regulators will punish them for innovating upon basic products.

An ecosystem would require decentralization and the participants would have to interact on a “many-to-many” basis. Ensuring broad trust within such a system with traditional methods was unimaginable, which is why the BaaS concept was considered utopian for a long time.

Fortunately, technological progress has brought us a solution to the problem of trust — the appearance of blockchain (decentralized recordkeeping) and instant smart contracts has made it possible.

Many professional market participants acknowledge the BaaS business model based on the blockchain as the optimal way to build a cooperation between classic banks and financial companies on one side, and advanced IT companies and the growing decentralized tech companies of the future on the other.

In this model, front-end customer service will be left to broad-profile banks, while financial products themselves will be offered by narrowly specialized fintech companies.

We believe that it is exactly the B2B2C combination of business models that will allow BANKEX to thrive amidst the development of global financial technology.

A platform for banking

In the long term, BANKEX plans to develop the BaaS idea and to create a platform accessed by storefronts ensuring access to end users — banks, payment services, electronic commerce sites, exchanges, insurance companies working in various jurisdictions with different technologies (called Originators in the BaaS model) — on one side; and by fintech companies aiming to launch their new product or enter new markets on the other side. Thanks to the platform, they can do it quickly and efficiently, without needing to ensure compliance with the legislation of each new country and to develop integration with each new bank. As the platform already contains all necessary APIs, it can provide access to a new player more cheaply and quickly.

It is of critical importance that the originator maintains control over access to its clients on the platform. BANKEX believes that this way, the BaaS platform will become a single window that the corporate or retail client can turn to, selecting and receiving services offered by various banks and tech companies in various countries. All the while, the solution of the technical and legal issues of connecting various players in the financial market will be the responsibility of the platform.

In summary, BaaS is a business model allowing for the construction of new financial products. Thanks to the decentralization of BaaS, this system will enable banks and clients to build new, fundamentally different relationships. It is exactly this system that will enable the transformation of the current banking industry and create a revolution in the field of finance.