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No doubt, the proliferation of APIs in the recent few years has greatly transformed the business models that exist in the banking sector. Experts suggest that there are three main strategies that will shape future business direction in the industry.
The first one refers to Banking-as-a-Platform (BaaP). This is the tool that allows third-party fintech developers to create products and services for bank customers. In this scenario, banks provide the general infrastructure, while third-parties are responsible for customer experience. Building BaaP architecture outside of legacy systems framework led to the creation of application “stacks” that take the form of building blocks. The latter then become accessible to third-partied through available APIs and can be “moved around” to develop new products and services.
In simpler words, while banks are able to take perfect care of security, authentication and compliance matters thanks to their expertise, fintechs leverage the power of innovation and a large degree of flexibility to develop new capabilities and services.
The second one is Banking-as-a-Service (BaaS), which divided the responsibility over customer experience among providers. It has extended the traditional concept of banking services through offering providers to do business through a unified digital channel. It is important, though, not to confuse it with the open APIs that banks create to distribute services on third-party ecosystems.
The BaaS approach assumes that the owner of the platform enables service provision by third-parties through specific technological tools. There are also platforms that source capabilities from various fintech startups and then offer them in a SaaS mode to financial institutions who are looking to enhance their offering and value proposition.
The third and last one covered in this article is marketplace banking, where banks start offering their customers numerous products and services from other providers. PSD2 has obliged banking institutions to build open APIs in order to provide third-parties access to their customers’ information. But another alternative opportunity is using competitors’ APIs and innovative solutions developed by promising fintechs. For example, new marketplaces that are being created offer not only the common banking services but also accounting, fiscal and legal ones to entrepreneurs. This means that even if a bank does not offer a specific service that a customer is looking for, it can simply refer him to a third-party that does. Therefore, new market players have an opportunity to gain entry to a complex and highly competitive market. At the moment, 30% of the BaaS platform players are incumbent banks, as it requires significant financial and technological resources to create a platform from scratch.
It is certain that open banking will continue to develop as a promising direction. Individual banks’ initiatives and evolving regulatory environment will help the trend proliferate globally and bring new opportunities and products to more people.