Banking-as-a-Service: Changing the Industry

It is not a secret to anyone following the events in the financial world that transaction banking is consistently vanishing, being replaced by modern and innovative financial tools. We have already entered the age of the API and Banking-as-a-Service. The traditional paradigm has been revised, mainly due to the need to reflect the technological advances and the cultural shifts, introducing an entirely new practice. So what is the reason the transaction banking has “passed away”?

Despite the fact that it was effective in covering the basic everyday transaction needs of corporate customers, it has lately been experiencing a significant lack of investment, in terms of both technology and talent. Transaction banking has been the connecting thread between banks, governments and companies and the payment routing technology, which is so necessary for an efficient operation. However, the innovation has changed the appearance of the industry once and for ever. We can distinguish the following drivers of change:

  • APIs, which let one product or service exchange data with another, have entered the scene;
  • Significant advances are implemented in software development;
  • Machine learning and artificial intelligence are taking the spotlight;
  • ACH is now powering real-time payments.

Let’s talk in detail about all of the above.

The API economy has outperformed both PSD2 and Open Banking. The most crucial step is the absence of need for a legislation to influence or support its existence. For instance, Big Tech have made their platforms accessible as components and as an API. Revolution is happening at every level, even when ordering an Uber, you are opening your location data through your phone. What has resulted from such changes is the unbundling of supply and service and a Software-as-a-Service transformation, giving customers a variety of new options connected to app use. By the way, Software-as-a-Service (SaaS) businesses, powered by APIs, follow a low-touch sales model. Along with recurring reclines and little customer concentration, low-touch sales constitute the core of SaaS businesses, which have a potential to become the businesses of the future.

Talking about payment routing, machine learning and artificial intelligence are just about to revolutionize it completely. Research is continuously carried out on how can ML be applied to improve financial services. The main goal is to turn data into helpful insights that customers can use to make financial decisions. Innovation is actively penetrating the financial industry, including with such developments as automated clearinghouse that is now boosting real-time payments.

Banking-as-a-Service is different from the existing marketplace model. The latter implies that customers of all sizes and coming from different segments may choose alternative third-party products, fully integrated by APIs. On the contrary, Banking-as-a-Service allows businesses, including traditional banks and FinTechs, to develop, improve and promote new customized products. An example could be savings or current accounts, as well as debit cards. Businesses can take advantage of the existing opportunities and develop such products in short time-frames and in the most efficient way for an affordable cost. By simply using a white label solution it is possible to avoid the lengthy development stage and settlement of legal issues, along with the need to acquire a banking license.

Such and similar solutions are currently being widely used by financial service companies and other corporate and governmental entities across Europe, and not only. The partnership ties that providers are able to establish with other professionals and experts in the field enable them to provide top-level services, tailored to the specific needs of the customer. With the help of APIs, companies are able to integrate into European payment mechanisms and gain access to such instruments as SEPA.

The innovations keep changing the climate on the international financial arena, bringing into the scene a significant amount of optimism and hope for future achievements. The goal seems to be quite comprehensive and ambitious: to enlarge and widen the financial ecosystem and make modern financial developments and services accessible to a larger number of customers around the world.