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Banking as a Service (BaaS) is a buzzword when it comes to the development of financial services in the country. Hence, it made its way to a prime discourse at Global Fintech Fest, 2022 where a group of fintech leaders discussed on how
‘BaaS will make every company, a fintech company’
BaaS is a breakthrough that is transforming the banking sector. It is a stepping stone towards greater growth of the fintech ecosystem.
Fintechs are integrating with banking APIs to build innovative products that offer better banking services and solutions to customers. Banks have moved on from their legacy business models to become full-stack BaaS players by collaborating with fintechs.
The rise of BaaS thus becomes a hot topic of discussion when it comes to the future of fintech. It is fast evolving and shaping the financial ecosystem in India.
The panel began with how the evolution of BaaS is leading the way for new business models. And, covered various aspects like regulatory compliances, as well as how BaaS impacts SMEs and MSMEs.
Aditi Olemann, Director of New Initiatives at Cashfree Payments, shared her insights along with the other panellists which included the likes of Sumit Agarwal, Founder and CEO at Vyapar, Sucharita Mukherjee, Founder & CEO, Kaleidofin, Jithesh PV, Head of Digital at Federal Bank and Rajesh Miranjkar, Managing Director and CEO at Kiya.ai. The discussion was moderated by Shashank Shekhar, Head of Consulting at The Digital Fifth.
Here are some highlights from the session.
The Future of BaaS
BaaS is the result of banks and fintechs working closely to offer superior financial services to customers. The question is how far will it evolve to impact the new business models?
Will BaaS enable every company to offer financial services? In that case, will BaaS turn every company into a fintech company?
Will every bank explore API banking?
The conversation flowed in a direction where the panellists believed that BaaS is here to stay. BaaS can enable automated payment services enhancing customer experience. Therefore, all companies will want to offer financial services on their platforms.
It is most expected that all companies will turn into a fintech offering financial services even if they are not fintech per se. More banks will also explore API banking and BaaS opportunities in the coming years.
Contemporary banking systems cannot survive in the digital ecosystem where fintechs can offer quick customer-centric solutions. But the banks play a pivotal role as it is them who provide the APIs to fintechs or third-party alliances.
Aditi said,
‘What we do as a fintech company, is always in partnership with banks. Banks are the bedrock but essentially because of our experience in building infrastructure with the banks, fintechs can fuel BaaS’.
Aditi also emphasised the point that it is important to facilitate banking products along with the payments. Payment aggregators and fintechs should aim to provide for a better digital ecosystem for both B2C and B2B customers.
Role of BaaS for SMEs/MSMEs
When we talk about BaaS, the consumers who consume these services must be taken into account. Considering this, the panel moved on to discuss the role of BaaS for SMEs and MSMEs.
Sumit Agarwal of Vyapar pinpointed the huge gap in the adoption of technology in managing the business. “Although payment is one section that has picked up, the digitisation of accounting and billings has not,” he said.
Vyapar and other solutions that aim at enabling digital accounting and billing for SMEs and MSMEs can do so with the help of BaaS. Unless the payment cycle between a merchant and a customer is seamless, the digitisation process will remain a challenge.
BaaS can also help in improving the eligibility of SMEs and MSMEs to avail of loans. This will help in immediate lending of capital to small, medium and micro businesses. Uploading bank account statements while they urgently need capital becomes a time-taking process. This leads to high drop points of MSMEs at lending platforms.
The banking and financial services can also help maintain the invoice details, expenses, purchase history and account details. This information can serve as the data point for lending and providing capital to small and medium businesses.
Regulatory Compliance for BaaS
The merging of banks and fintechs to offer BaaS often raises questions on data privacy and other regulatory compliances.
BaaS platforms need to have certain cyber security, cloud security and a lot of other security assets which banks are currently mandated in the country.
Rajesh Miranjkar from Kiya.ai talked about providing solutions for regulatory compliance of banks through AI and other complex analyses. Banks have the entire data repository of customers and they are responsible for reporting anomalies to regulatory authorities.
Banks can also use this huge database for onboarding new customers like credit or help the BaaS platforms with onboarding new customers. Miranjkar said that they design solutions for BaaS where they offer micro-services for the fintechs that they can easily consume.
Data will be the base of whatever people will seek from the banking systems and so the focus on API integration is going to remain. Securing the database is all-important and regulatory.
What may change in the coming times is the way the core systems service their customers. The data will come through micro-services and there will be far more scalable services.
Embedded Finance Vs Payment Aggregators
When we talk of every company becoming a fintech company by offering financial services, that is where the phenomenon of embedded finance comes into play. On one hand, we have banks that provide BaaS to players that employ embedded finance. On the other hand, we have payment aggregators as a business model.
The evolution of these two business models within the API integration space should be seen as collaboration, and not as competition. Payment aggregators speed up the financial services given to customers for a superior experience.
The fintechs are dependent on the resourcing from the bank side where the banks have to actually hand-hold each and every feedback. If aggregators come in, it is a job easy for the banks rather than the fintechs struggling in each and every integration.
The conflict of interest between partners and aggregators can arise if the aggregators would want to become fintech themselves. The data secrecy and confidentiality of information becomes a question in such a case.
Role of Payment Aggregators
Cashfree Payments, a pioneer in payments and API banking, enables 1,50,000+ businesses to have a seamless payment experience. As we work with multiple banks and partners, we were asked about how our business model works.
“If a customer wants a financial service from you, then how do you provision which banking API or banking partner services should work with them?” asked Shashank Shekhar.
Aditi Olemann underlined the fact that while this is still an evolving model, a lot of aspects from regulatory and operational standpoints need to be taken care of. The requirement of fintech and which banking partner can fulfil that need is what we essentially envision.
Citing a use case, she says,
“If there is a certain kind of KYC process that the fintech prefers; or if there is a fintech that serves tier-two or tier-three audiences where they prefer a biometric KYC for card issuance versus another one preferring a video KYC, these are parameters we need to consider. There are a lot of aspects that determine which partner to go with.”
Here again, banks and aggregators need to work very closely together. This is because the aggregators can fully support the banks and also the partners to tap into the market faster.
Aditi also called attention to the liabilities of B2C banking products where data privacy is supreme. As Cashfree Payments is already working on an embedded lending stack, we want to ensure a seamless process for anchor platforms and end customers keeping in mind the regulatory aspects.
Merging of Web3 onto BaaS
Web3 is emerging with cryptocurrencies, blockchain and many kinds of decentralised finance. The merging of web3 into BaaS is a prominent question for the future of fintechs.
Rajesh Mirjankar said that they plan the implementation of web3 using metaverse and are in touch with banking partners to have BaaS on it. He brought to focus some major factors:
- For merging Web3 onto BaaS, there needs to be distributed architecture for databases where data belongs to the owners of the database
- Having a payment mechanism that has the capability to render conventional payment systems but also extend to new technologies like crypto would be vital
- In BaaS under a web 3.0 architecture, interfaces would move to be more led by the micro-services to enable a distributed data ecosystem
- Banks will play an important role in regulatory change
In a nutshell
The panellists consisting of industry experts discussed various facets of BaaS and what its future looks like. BaaS is a disruptive force that is taking over the fintech industry and evolving in multiple ways.
While all companies can turn into a fintech offering BaaS, how the regulatory challenges of this predicament will be tackled will surely be interesting.
