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Banking as a Service 101

Unbundling the Traditional Banking Services

Banking and payments in India over the past five years have transformed significantly. Tap and pay, paperless credit facilities and contactless KYC verification are some of the key changes that we are experiencing thanks to the digitization of these services. Moreover, our banking habits have also evolved drastically that we almost forgot when we visited the bank last time.

Let’s see how these changes have been reflected in our day to day transactions with some examples.

  • Kavita, a retail grocery shopkeeper receives a business loan within a fraction of time without providing mountains of documents for KYC.
  • Abhishek’s savings bank account, trading, and Demat accounts are created and activated within 24 hours. 
  • Vikas, an entrepreneur from a remote village pays salaries to his employees within a few minutes from an app on his mobile.
  • Desma, a freelancer, can securely take up international work without worrying about non-payment. 

Thanks to technological advancements and digitization in banking services, we are better off with financial transactions, either a payment to a vendor or an application to obtain a bank loan. Interestingly, the open banking market is booming, and its market size across the globe is anticipated to touch $ 43.15 billion by 2026.

But what is the secret of a mega transformation of traditional banking services? 

Today, when almost everything is available at your fingertips, why not banking services? Think of obtaining financial assistance, and it is done just by one click through an app in your mobile that can securely access relevant information from your bank without your data being tampered with.

It is possible through Application Programming Interfaces (APIs), a software agent (intermediary) that communicates with two applications to exchange data and information. Banking APIs have opened the doors for banking and Banking-as-a-Service (BaaS) to build an ecosystem for a safer, faster, and more accessible banking experience for all. With more stimulated customer engagement, banking APIs are paving the way for a better ecosystem for developers of APIs and API services providers. 

Banking APIs have transformed the banking landscape by providing a seamless experience, innovative solutions coupled with integrated ancillary services, and a robust mechanism. The unbundling of the traditional banking services is thus required to eliminate the obscurities experienced previously by re-bundling them into modern banking functions. 

In this module, we will discuss different traditional banking services offered by banks, types of banks, unbundling conventional banking services, and how to re-bundle them as current banking services. 

So, let’s begin our journey of understanding the traditional banking landscape with an understanding of conventional banking and how it is done. 

What is Traditional Banking?

Core Banking refers to accepting deposits from customers and lending the money to the individuals and businesses to meet their lending and investment needs along with other ancillary services such as cross-border payments, savings accounts, receipt of government benefits, etc. 

In other words, banking includes accepting money from customers in savings as well as deposit accounts, accepting and making payments through cheques or other instruments, investing in Government-backed securities, lending activities, cross-border payments, issuing credit/debit cards, safe vaults, international remittances, trade finance activities, and account management and many more. 

Banks perform various financial activities to ensure cash, credit, and other customers’ financial requirements are met in return for some fees. Not all banks offer all of these services, and hence these banks are categorized into various types based on the activities they perform and the customer segment they target. For example, retail banks offer banking services to individuals and families, while corporate banks offer businesses. 

Let’s see how many types of banks perform traditional banking services.

Types of Banks

Typically, each country will have a central bank that regulates the functions of the other banks in the country. However, there are several types of banks based on their functionality and the customer base they target. 

For example, corporate banks target corporate customers, while retail banks cater to individuals and small businesses.

Below are the different types of banks prevailing in India.

Central banks

The central bank is the core of the banking industry in any country. Often referred to as a Reserve Bank or a Federal Bank, central banks ensure smooth liquidity in the industry while also taking care of the monetary policies of all banks. 

The central bank is the core of the banking industry in any country. Often referred to as a Reserve Bank or a Federal Bank, central banks ensure smooth liquidity in the industry while also taking care of the monetary policies of all banks. 

The central bank holds regulatory powers and is a monetary authority that controls activities performed by the other types of banks. The supervisory capabilities enable the central bank to curb fraudulent activities and create anti-money laundering policies. India’s central bank is the Reserve Bank of India which governs the Indian banking industry. 

Commercial Banks

Commercial banks offer banking services such as accepting deposits, issuing debit/credit cards, providing personal and business loans, and locker facilities to individuals and companies of different sizes.

Commercial banks offer banking services such as accepting deposits, issuing debit/credit cards, providing personal and business loans, and locker facilities to individuals and companies of different sizes.

Most of us have our accounts with these commercial banks such as State Bank of India (SBI), ICICI Bank, Axis Bank, etc. The economy depends on such banks because they are significant cash, capital, and liquidity drivers. Commercial banks have many divisions that cater to a specific customer base; for example, the retail banking division deals with the public directly. 

Moreover, Commercial banks are further classified into Scheduled and Non-scheduled Banks.

Scheduled Banks

Scheduled Banks are those listed in the Second Schedule of the RBI Act, 1934, and hence, they can obtain loans from the RBI at the bank rate. Scheduled banks enjoy certain benefits such as membership to clearinghouses and the ability to raise and borrow funds from the RBI. Scheduled banks such as SBI and its associates have to maintain a Cash Reserve Ratio (CRR) with the RBI.

Non-scheduled Banks

Non-scheduled banks are not listed in the second schedule of the RBI Act, 1934, and they can not raise money from the RBI except for emergencies. They maintain the CRR with themselves and can not become members of the clearinghouses. 

Most rural co-operative banks, urban co-operative banks, and local area banks are non-scheduled banks.

Co-operative Banks

The concept of Cooperative banks originated to curb the rural lending system that would end up in a giant debt trap. In cooperative banks, the customers are given ownership rights in the bank, and hence, they are called members. 

The concept of Cooperative banks originated to curb the rural lending system that would end up in a giant debt trap. In cooperative banks, the customers are given ownership rights in the bank, and hence, they are called members. 

Rural Co-operative Banks (RCBs)

Cooperative banks, often called credit institutions, have many sub-divisions in rural areas, primarily divided into short-term and long-term credit institutions. 

The short-term rural co-operative banks are again divided into State Co-operative Banks, District Central Co-operative Banks, and Primary Agricultural Credit Societies, all catering to a different customer base. 

Examples of short-term rural co-operative banks include Jalgaon District Central Co-operative Bank Ltd and The Navbharat Multi-State Agro Farming and Marketing Cooperative Society Ltd. 

State Co-operative Agricultural and Rural Development Banks (SCARDB) or Primary Co-operative Agricultural and Rural Development Banks (PCARDB) are the types of long-term rural credit institutions. For example, The Gujarat State Co-operative Agricultural and Rural Development Bank Ltd provide development finance for agricultural and related activities.

Urban Co-operative Banks (UCBs)

Under Urban Co-operative Banks, there are only two types of sub-divisions where the banks can either be Scheduled or non-scheduled UCBs. Some UCBs operate in multiple states, while some other UCBs operate only in one state. Cosmos Co-operative Bank Ltd is one of the oldest Urban Co-operative Banks in India.

Local Area Banks (LABs)

The Government of India sets up the local area banks to enable savings and investment practices in rural and semi-urban areas to ensure the money floats in the right direction where it is required the most, i.e. for agricultural or similar developments.

The Government of India sets up the local area banks to enable savings and investment practices in rural and semi-urban areas to ensure the money floats in the right direction where it is required the most, i.e. for agricultural or similar developments.

The Coastal Local Area Bank Ltd is one such bank operating in India since 1999. It is directly governed by the RBI providing Agri services to develop rural and semi-rural areas.

Regional Rural Banks

Government-owned Regional Rural Banks serve the specific purpose of developing rural areas of a state in which it is established by providing essential financial and banking services. Many commercial banks have a sub-division under which they offer regional rural banking services to their customers in rural areas.

Government-owned Regional Rural Banks serve the specific purpose of developing rural areas of a state in which it is established by providing essential financial and banking services. Many commercial banks have a sub-division under which they offer regional rural banking services to their customers in rural areas.

Baroda Gujarat Gramin Bank, Jharkhand Rajya Gramin Bank, and Dakshin Bihar Gramin Bank are some examples of Regional Rural Banks in India.

Payments Banks

Operated on a smaller scale, Payments Banks provide almost all banking services except for issuing credit cards or advancing loans to customers.

Operated on a smaller scale, Payments Banks provide almost all banking services except for issuing credit cards or advancing loans to customers. Moreover, the deposit amount is also restricted to INR 200,000 per customer. 

Some key market players in the Payment Bank industry are Paytm Payments Bank, Airtel Payments Bank, and Jio Payments Bank.

Small Finance Banks

Small Finance Banks are conceptualized by the Reserve Bank of India (RBI) to cater to small businesses and micro to medium size businesses.

Small Finance Banks are conceptualized by the Reserve Bank of India (RBI) to cater to small businesses and micro to medium size businesses. These banks provide all banking services with a primary function of lending and taking deposits. 

Equitas Small Finance Bank, AU Small Finance Bank, and Jana Small Finance Bank are some top performers in India to offer financing services to the MSME sector.

Specialized Banks

The specialized banks offer services to certain businesses that aim to set up a business in a specific business area or activity such as agriculture or export-import.

The specialized banks offer services to certain businesses that aim to set up a business in a specific business area or activity such as agriculture or export-import.The specialized banks provide support and banking services to such particular purpose businesses. In India, three specialized banks are catering to a specific purpose of companies are – 

National Bank for Agricultural and Rural Development (NABARD)

The NABARD is specifically established by an act in the parliament that works as the central bank for financing agricultural and rural development banks. NABARD provides credit facilities to the regional rural banks, co-operative banks, and credit societies to cater to agricultural, small businesses, handicrafts, and allied economic activities, cottage, and village industries in rural areas.

Export-Import Bank of India (EXIM)

To accelerate and support the foreign trade in India, the Government of India set up an EXIM bank that provides financing and support services to the institutions engaged in financing export and import services. EXIM works as a principal bank that caters to the financing activities of the export-import activities for smooth governance.

Small Industries Development Bank of India (SIDBI)

SIDBI was established to develop small-scale industries in India to offer financing and business set-up services. SIDBI coordinates the work of all banks working towards developing small businesses. 

That broadly covers what different types of banks we have in India. Now, let’s look at the different categories of banking services are there.

Types of Banking Services

Banking is a huge industry and each bank will have different functions catering to various customer segments. However, certain basic services such as savings and checking accounts, accepting deposits, and lending services are the most common services almost every bank provides. 

Below are different types of banking services that are offered by the traditional financial institutions in India. 

Savings Account Services

This is the most common service provided by banks to their customers. The services allow you to keep your money securely with banks to earn interest income. 

This is the most common service provided by banks to their customers. The services allow you to keep your money securely with banks to earn interest income. 

A savings account enables you to avail many other services such as deposit account services, receiving or paying money through cheques, availing of debit/credit card services, etc.

Accepting Deposits

Banks provide deposit account services to keep your money in deposit accounts for a specific period on which banks pay regular interest income to you. Interest paid on deposits is higher than the interest paid on the savings account. The deposits mature only at a specified date, and banks can use the deposited money to lend to others. 

Cheque Receipt and Payments

When you have a savings account with a bank, you can receive/pay money via cheques. Banks issue cheque books to you upon opening an account with them, which you can use to make payments to others. 

However, if the cheque contains an amount higher than the available balance in the account, it gets bounced, and banks charge fees.

Credit/Debit Card Services

You can use Debit Cards issued by banks to withdraw money either from banks or ATMs, and you can also use them to make payments of in-store and online purchases. Debit cards use a Personal Identification Number (PIN) to secure payments and money withdrawal. 

On the other hand, you cannot use credit cards to withdraw money. However, you can use it to make payments on a credit basis. When you use a credit card for payments, the money is not debited from your account; the issuing bank pays it on your behalf. 

You are given a credit period (monthly in most cases) within which you are required to make payment to the bank for all the payments you make on a credit basis using the credit card. Banks also issue credit card statements that list all the payments made and the credit period you must pay the amount due. If the amount is not paid within the specified period, banks charge hefty fees on the overdue amount.

m-Wallets 

Banks allow m-wallet services through an app whereby you can add credit/debit card information to make instant payments without adding details every time you make a purchase. You can avail of them through an app on your mobile to add your credit/debit card number for payments.

Startups such as Paytm and Mobikwik are some key players offering m-wallet services in India along with other payment options.

Prepaid Payment Instruments (PPIs)

On the other hand, Prepaid Payment Instruments (PPIs) allow you to purchase goods, services, transfer funds, and financial and remittance services for the value stored in the PPIs. For example, online and mobile wallets, or paper vouchers are PPIs that hold a specific value against which you can make purchases.

Current Account Services

Businesses need current accounts as they perform multiple banking transactions in a day.

Businesses need current accounts as they perform multiple banking transactions in a day. Banks offer current account services where customers can set standing instructions for payments recurring in nature, set auto-debit advice for certain other payments, withdraw cash, receive money, obtain overdraft facilities, and obtain short-term or long-term credit facilities

Trade Accounts

Trade account services offered by banks aim to cater to the businesses’ international trade finance requirements. Many commercial banks like ICICI Bank and HDFC bank provide trade account services to cover export and import-related requirements, trade finance transactions, and international and domestic remittance services under one trade account.

Trade account services offered by banks aim to cater to the businesses’ international trade finance requirements. Many commercial banks like ICICI Bank and HDFC bank provide trade account services to cover export and import-related requirements, trade finance transactions, and international and domestic remittance services under one trade account. 

Services such as import remittances, bill of entry, buyer’s credit, letter of credit, import bill collection, inward remittances, export bill regularisation, export finance, export bill collection, bank guarantee, bill discounting, inland letter of credit, working capital loan, Foreign Direct Investment (FDI) account, Overseas Direct Investment (ODI) account and External Commercial Borrowing (ECB) are provided under trade account services.

Credit/Lending Services

As one of the main services banks provide, lending services are why banks operate. You can get financial assistance in the form of loans, and advances of short-term and long-term against a specific interest rate charged by the banks.

As one of the main services banks provide, lending services are why banks operate. You can get financial assistance in the form of loans, and advances of short-term and long-term against a specific interest rate charged by the banks. 

The banks offer loans for various purposes, such as car loans to buy a new car. Similarly, students get educational loans to pursue a career in India or abroad. Apart from car loans and education loans, banks also offer other forms of loans, such as business loans, personal loans, gold loans, and housing loans.

The interest rate depends on the borrower’s creditworthiness, and you are required to repay the money in Equated Monthly Installments (EMIs).

Payments and Remittances

The payments and remittances services enable you to automate the payments and remittances to the person or an entity at a specified date and time.

The payments and remittances services enable you to automate the payments and remittances to the person or an entity at a specified date and time. For example, you can automate your monthly rent payment using this service, and you just need to enter the beneficiary’s details with the standing instructions on making the payment.

The remittance service allows you to electronically transfer funds to another party in another country and your home country. Certain remittances within the country are also done using cheques and demand drafts.  

NRE/NRO Services

If you stay outside your home country, you can open Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts with your bank in your home country.

If you stay outside your home country, you can open Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts with your bank in your home country. NRE account allows you to transfer your income earned outside of your country to your account in your home country.   

The NRO account allows you to receive and manage income earned in India. You can transfer funds from an NRE account to NRO, but the reverse is not allowed.

Overdraft Facilities

Another type of credit facility provided by the banks is the overdraft service. This service allows you to withdraw more than the money kept in the bank

Another type of credit facility provided by the banks is the overdraft service. This service allows you to withdraw more than the money kept in the bank, and the bank charges interest on the overdrawn money.

Automated Teller Machine (ATM) Services

The ATM services allow you to withdraw money at any time since they are open 24×7.

The ATM services allow you to withdraw money at any time since they are open 24×7. Banks ensure providing ATMs at most places to make it easy for you to withdraw money from anywhere.

Merchant Acquisition Services

Banks also offer merchant acquisition services to cater to businesses accepting payments in various credit cards and payment gateways.

Banks also offer merchant acquisition services to cater to businesses accepting payments in various credit cards and payment gateways. It includes credit card processing, online transaction processing, payment gateways, Point of Sale (PoS) systems, loyalty programs, check services, and credit card terminals.

Foreign Currency Exchange

Most commercial banks have a separate cell called wealth and investment management, where your relationship manager can advise you on financial planning and wealth building.

Most commercial banks have a separate cell called wealth and investment management, where your relationship manager can advise you on financial planning and wealth building. 

Large corporate banks also provide fundraising consultancy for the capital raising requirements of their customers, who are business owners.

Wealth & Investment Management

Banks provide foreign exchange services where you can receive foreign currencies. Banks also offer Forex Trading Services

Banks provide foreign exchange services where you can receive foreign currencies. Banks also offer Forex Trading Services to trade on different exchange rates of foreign currencies.

Lockers

Banks provide locker/safe vault facilities where you can safely keep your valuable belongings such as gold jewellery, gold coins

Banks provide locker/safe vault facilities where you can safely keep your valuable belongings such as gold jewellery, gold coins, important documents, etc. Banks charge locker rent for providing such service.

Types of Banking

We already understood different types of banking and banking services, but, many banks have different categories of banking provided based on the customer segments they cater to. For example, investment banking will serve corporate clients to raise capital. 

Most scheduled commercial banks will have these types of banking divisions. So, let’s understand each one of them in detail.

Retail Banking

This division caters to individuals and families, in other words, the public at large. Under this division, individuals can avail essential banking services, from opening savings accounts to obtaining loans or credit facilities. 

This division caters to individuals and families, in other words, the public at large. Under this division, individuals can avail essential banking services, from opening savings accounts to obtaining loans or credit facilities. 

Most commercial banks like SBI, and ICICI Bank also offer insurance, mutual fund investments, and other financing services under the retail banking division.

Corporate/Commercial Banking

The corporate or commercial banking division provides banking services to small, medium, and large businesses. However, certain commercial banks offer banking services to small businesses under the retail banking division. 

The corporate or commercial banking division provides banking services to small, medium, and large businesses. However, certain commercial banks offer banking services to small businesses under the retail banking division.

This division typically covers loan and credit services, trade financing services, equipment leasing, and cash management services, along with the other essential services.

Investment Banking

The investment banking division helps corporates in raising funds and capital. This division offers specialized services to large businesses to launch an Initial Public Offer (IPO), raise capital by issuing equity shares, underwriting debt, and other ancillary services. 

The investment banking division helps corporates in raising funds and capital. This division offers specialized services to large businesses to launch an Initial Public Offer (IPO), raise capital by issuing equity shares, underwriting debt, and other ancillary services. 

Some of India’s most prominent players in investment banking include Axis Bank, Barclays Bank PLC, and Credit Suisse Securities (India) Private Ltd.

Global Banking

The global banking division deal with the cross-border transactions of its customers. Businesses can avail the of trade financing and liquidity management services, receive foreign currency cards, and open multi-currency accounts under this division.

The global banking division deal with the cross-border transactions of its customers. Businesses can avail the of trade financing and liquidity management services, receive foreign currency cards, and open multi-currency accounts under this division.

India has Citibank, HSBC Bank, Standard Chartered Bank, and many such global banks offering cross-border services and much more.

Private Banking

With a target customer base of High Net Worth Individuals (HNWI), a private banking division offers banking, investment, and financing services, all under one roof.

With a target customer base of High Net Worth Individuals (HNWI), a private banking division offers banking, investment, and financing services, all under one roof. Like wealth management services, private banking also provides basic banking services of opening saving accounts and issuing credit/debit cards while also offering portfolio management and financial planning services. 

Most large commercial banks such as ICICI Bank and HDFC bank offer private banking services and other specialized service

How Does Unbundling Banking Services Transform Banking Entirely?

The unbundling of traditional banking services is a process where we separate each service offered by the banks and other financial institutions, understand and categorize them to re-bundle into modern banking products and services.

The advantage of unbundling banking services is that it will give more space to re-think which services are challenging and how they can be offered more efficiently using technological advancements. Banking APIs are changing how banking is done and banking services are offered.

To understand the unbundling process, we must know how APIs, especially banking APIs, can play a significant role in transforming traditional banking services.

APIs: Banking API, its Origin, Types, Functions, and More

In the last decade, we have seen a transformation in our daily routine from fitness apps to grocery buying; the transmission of data and synchronization of the information from one app to another is done within a blink of an eye. And that’s exactly what an API does – it communicates to the applications, gets access to the details stored in the application, and exchanges with the other application or program safely to offer a seamless customer experience.

In the last decade, we have seen a transformation in our daily routine from fitness apps to grocery buying; the transmission of data and synchronisation of the information from one app to another is done within a blink of an eye. And that’s exactly what an API does – it communicates to the applications, get access to the details stored in the application, and exchange with the other application or program safely to offer a seamless customer experience.

Banking API, similarly, acts as a messenger between the customer’s bank and the third-party servers to offer the customers innovative banking products and services at their fingertips without visiting the bank or worrying about the physical document submission.

As per the key study conducted on the Indian mobile banking consumers, The emergence of API banking created space for Open Banking and Banking-as-a-Service. Let’s deep dive into the origin of API Banking.

Origin of an Era of API Banking

API Banking seems to have been recently emerged as the new banking norm. However, it is the ecstatic result of many small experiments and steps made over 50 years. The issuance of the First Payment Service Directive (PSD1) in 2007 and PSD2 in 2018 are the two pillars of what Open Banking has emerged as today.

  • The banking that we do now is evolved from the concept of digital banking. The idea was originated more than 40 years ago in Germany when the German Federal Post Office tried a screen text experiment on five computers, of which only a few could pass the transaction at a plodding pace.
  • Then year after year, new experiments were done, people started using ATMs and then came the era of the internet in 1980, and digital banking became the norm by 1990.
    The emergence of e-Commerce and broadband made it easy for online banking to be available to every consumer by 2000.
  • In 2007, the European Commission issued the first Payment Service Directive (PSD1) to adopt innovative payment services.
  • The successful advent of digitisation of banking services led Competition and Markets Authority (CMA) in the UK to ask top banks to allow access to their information to third parties in 2016.
  • 2018 was marked as the origin of Open Banking as PSD2 came into force in Europe to increase competition and bring innovations in the payments services offered.

India also marked its presence by incorporating the National Payments Corporation of India (NPCI) in 2009 to innovate the payments methods for a safer and faster consumer experience. Later in 2016, under the guidance of the RBI, NPCI issued Unified Payments Interface (UPI) for the public to offer the seamless experience of making payments using UPI Ids.

And, the rise of APIs does not stop there. Many FinTech companies and non-banking players in India and across the globe have developed or are developing products to offer seamless banking functions using different types of APIs. With so many APIs available in the market, APIs can be categorised broadly into three types – Open API, Public API and Private API.

Types of APIs

The Banking APIs act as the enablers of the re-bundling process. They are of three types: Open API, Private API, and Partner API.

Public/Open APIs

The public APIs or Open APIs are available openly and freely on the internet for developers, fintech companies and third parties to use and bring innovative ideas on how to optimise their usage. Such APIs sometimes require user registration or an API key to access the open APIs.

Private/Internal APIs

Private APIs are available only for internal use, and hence, these APIs are not exposed to external developers. A company’s internal development teams will enhance its customer experience by integrating such APIs with the existing service lines.

Partner APIs

Partner APIs are open yet private for external use. In other words, the partner APIs are available to the strategic partners who can access using specific access permission or entitlement. The partner APIs provide options to use APIs outside the company, but after gaining certain rights to use it externally in order to incorporate a strategic alliance.

How Do Banking APIs Work?

To understand how the Banking APIs work, let’s consider an example where a third-party application called Xpend wants to create its customer’s spend analysis from its customer’s bank statements and credit card payments. The banking APIs will come into the picture to communicate between the customer’s bank and the Xpend app to enable the seamless transmission of the data as follows:

  1. Xpend will ask the Banking API provider such as Cashfree Payments to get the customer’s bank and credit card statements from his banks such as ICICI or SBI.
  2. Cashfree Payments will use its API to communicate with the customer’s bank, gain secure access, and receive the data.
  3. Cashfree Payments will then return to the Xpend application to provide the customer’s data so that Xpend can generate the customer’s spend analysis without going to the customer’s bank.

The entire process is done within a fraction of time to offer the customer a seamless experience. This has enabled FinTechs and non-banking players to offer Banking-as-a-Service (BaaS) to its customers to efficiently use the advanced technology to offer value-driven products and services that ultimately reduce countless efforts by the customers.

That’s how open banking and BaaS have made an easy, faster, and safer banking experience for us that it seems logical to unbundle the traditional banking services to shuffle and re-bundle them into more meaningful products and services.

So, let’s begin to unbundle the traditional banking services into five broad categories of Banking, Acquiring, Issuing, Lending, and Payments Services.

Unbundling Traditional Banking Services

The unbundling process of these traditional banking services can be done by categorizing the services into five major categories: core banking services, acquiring services, issuing services, lending services, and payment services.

So, let’s get started.

Core Banking Services

The core banking services include account opening, payments, lending, retail banking, corporate banking, deposits and savings account services.

The core banking services include account opening, payments, lending, retail banking, corporate banking, deposits and savings account services. The unbundling of these services will enable us to create an API-based modified banking function that can offer a seamless customer experience. Now, let’s deep dive into the core banking functions.

Retail/Corporate SME Banking

About 65 million Micro, Small, and Medium Enterprises (MSMEs) of the developing countries do not get access to financing services of USD 5.2 trillion each year which means these MSMEs get funds from their friends and family to expand their business.

Using APIs, the banking services can be reformed into a modern banking function so that these MSMEs can have a hassle-free experience resulting in growth in their businesses since, they contribute significantly to employment creation and economic development worldwide.

Savings and Micro Savings

Savings account services are the most common services every traditional bank would provide to its customers. However, Micro savings provide you with opportunities to open smaller deposit accounts to encourage individuals save smaller amounts of their savings.

Deposits

The deposit service is the most utilised service provided by the bank as every customer will have at least one deposit with the bank. However, the low-interest rates on these deposits are causing cashing out of such deposits by customers as other investment instruments offer more competitive returns.

Moreover, creating and closing deposits is not as user-friendly as possible, and certain old paper deposits can only be closed by visiting bank branches. With the help of APIs, the opening and closing of new and old deposits can be streamlined to make the process quick and easy.

Account Opening, Account Management

The account opening procedure for any bank requires KYC compliant documentation, which is not smooth for every customer. Account opening and account management could have been more efficient if APIs had been used.

Acquiring Services

In simple terms, acquiring services are considered one of the core banking services as it allows you to make payments at merchants for your purchases with the help of payment cards.

In simple terms, acquiring services are considered one of the core banking services as it allows you to make payments at merchants for your purchases with the help of payment cards. Let’s look at how are these services provided under the traditional banking system and how they can be unbundled to reform as a modern banking function using APIs.

Payment Aggregators (PA) and Payment Gateways (PG)

Payment aggregators act as a medium for the merchants to integrate various payment services on one platform to receive payments through UPI, IMPS, m-wallet, cards, online banking, etc. Without them, merchants will have to integrate themselves separately with each bank, NPCI, card network and so on.

The Payment Gateway is a medium through which all the debit/credit card, online payments, and UPI transactions are routed. The transaction information is transferred through electronic mode using APIs. The payment gateway can be covered under Payment Aggregator’s services.

In India, payment aggregators like CCAvenue, Bill desk have changed the entire experience of online shopping and bill payments. Cashfree Payments Gateway offers 120+ payment modes to receive or accept the payments, including instant refunds.

Merchant Acquisition

In merchant acquisition services, the merchant’s bank provides card payment processing services where the merchant acquirer, that is, the merchant’s bank acts as an enabler to accept card payments from most banks to increase the potential sales by its client.

However, the merchant acquisition process is still complicated in which the card payment passes through many players such as a merchant, merchant acquirer, card association, issuing bank, etc.
We can address this challenge by bringing APIs into the payment processing system as a re-bundled service.

Merchant Onboarding

A merchant onboarding process is simply understood as enrolling a merchant to avail payment processing services by the payment facilitators. With the advancement of technology, the process has been made faster than the traditional one.

Issuing Services

The issuing services provided by banks include mainly opening of savings or current accounts, issuing of debit or credit cards, enabling m-wallets and prepaid cards to its users and allowing them to keep virtual cards and accounts.

The issuing services provided by banks include mainly opening of savings or current accounts, issuing of debit or credit cards, enabling m-wallets and prepaid cards to its users and allowing them to keep virtual cards and accounts. Let’s discuss them in detail.

Savings/Current Accounts

Opening of savings and current accounts with banks had been a cumbersome procedure, but thanks to APIs, you can now open savings accounts within a few hours-long process. This unbundled service can again be re-bundled to offer a seamless customer experience where the customer need not repeat the KYC procedure complied before for someone else.

Moreover, the re-bundled service could also encounter the challenge of requiring customers to keep the minimum balance in the savings account.

Debit/Credit Cards

Every customer will sign-up for a debit card, and the majority of them would also opt for credit cards as they serve as a plastic currency. The service is unbundled to investigate how the user experience can be improved using thousands of available APIs.

One of the ways is to provide statistics and analysis of customer spending from the cards so that the customer is aware of where his money goes and how much he spends with his debit or credit card.

M-wallets/Prepaid Cards

The mobile wallets (m-wallets) store your credit and debit card information through which you can make online payments for the purchases. Usually, these m-wallets are stored in the app installed on your phones, such as Google Pay or PhonePe.

The prepaid cards are similar to m-wallets, but they hold a specific amount in the wallet, and hence, they are called prepaid cards. With so many m-wallets and prepaid cards, APIs could be used to streamline all into a single unified payment wallet or a card so that every customer and every merchant can use a single platform to perform the transactions.

Virtual Cards/Virtual Accounts

Virtual cards are digital cards that you can request from your online banking service portal. These cards allow you to make purchases & pay your bills without owning a physical card.

Lending Services

While lending services are the most vital services the banks provide, many new credit facilities have emerged. Let’s look at the types in which lending services are provided.

While lending services are the most vital services the banks provide, many new credit facilities have emerged. Let’s look at the types in which lending services are provided.

Micro Credit and Short-term Finance

The concept of microcredit and short-term finance originated to help individuals and small businesses of developing countries grow. It is a credit facility where the borrower takes a small loan due to his low-income range. APIs can play a significant role in microfinancing by providing credit scores from non-traditional resources since these individuals or small businesses may have no credit history.

Trade Finance & Supply Chain Finance

The trade financing activity involves financial instruments and products used for international trade. In contrast, supply chain finance ensures that the buyer approves the seller’s invoices to initiate the financial transactions by the bank through an arrangement.

As per the ADB Survey 2020 issued by the Asian Development Bank, the global trade finance gap reached its all-time high at USD 1.7 trillion. Most small businesses had unmet financial needs due to the rejection of applications.

Using APIs, fintech companies can bridge a gap between the banks & small businesses to compete at an international level. We can also address the issue of the trade finance gap.

Instant Loans

Instant loans are short-term loans offered online or through apps that require minimal documentation, and they also do not need to check your credit score. To name a few instant loan providers, MoneyTap, PaySense, are the prominent players in this sector.

Buy Now, Pay Later (BNPL)

The Buy Now, Pay Later (BNPL) arrangement allows you to buy a product when you want to and make the payment over some time. These instant loans are becoming quite popular as customers have understood the importance of credit facilities from a financial planning viewpoint.

Pay Later apps such as LazyPay, Simpl are offering Buy Now Pay Later services on many e-commerce sites, including Amazon and Airtel.

Point of Sale (PoS) Finance

While shopping online, you must have come across an option where the e-commerce site tells you to buy a product by paying a small EMIs per month against an entire amount at the point of sale. The PoS financing is done without you having to leave the e-commerce website.

While some PoS lenders offer financing at 0% interest, some charge up to 30% of the loan amount, some key players include Ingenico International India Pvt Ltd, Cashfree Payments India and PayU Payments Pvt Ltd.

Credit Scoring/Underwriting

As an essential element of a lending service, the banks also provide credit scoring services. Credit scoring refers to the creditworthiness check performed by the banks and other financial institutions to understand whether the borrower will make repayments regularly or not. The scoring also helps determine the interest rate for the loans where the principle of ‘higher the credit risk, higher the interest rates charged by the bank’ applies.

Many large banks provide underwriting services where they assume the financial risk of the applicant and guarantee the payment of the amount involved in the agreement for a service fee.

APIs will be quite a game-changing event in lending and insurance services. Users will get a single integrated platform to avail themselves of the insurance, underwriting, lending and credit scoring facilities.

Aggregating Customers/Lenders

The aggregating customers and lenders is not a banking service but an ancillary service to the essential banking function of lending. Certain websites act as an aggregator whereby customers and lenders get access to each other’s information, and they can select the customers/lenders based on their criteria, conditions, and requirements.

The borrower-lender aggregators act as middlemen to connect various borrowers to different lenders available in the market.

API-enabled software can significantly help collect and arrange data from various banks and other available resources to make it a vast network of lenders and borrowers.

Payments Services

The banks & financial institutions offer payments services where you can receive, remit and pay money from/to the domestic and international vendors, service providers & customers.

The banks & financial institutions offer payments services where you can receive, remit and pay money from/to the domestic and international vendors, service providers & customers.

Below are the types of payment services and how they can be integrated with API-enabled applications to offer a more extraordinary user experience.

Funds Transfers

The fund transfer facility allows you to send and receive money electronically to another location in the world. The usual fund transfer process in a bank takes time to approve the new beneficiary. It allows you to transfer funds after a few hours of adding the beneficiary details.

APIs can play an important role where the beneficiary details are secured safely on a portal. It can quickly verify the details and allow users to transfer the funds immediately.

Immediate Money Transfer Service (IMPS) is one such step towards allowing users to make prompt payments. However, the service allows only a specific threshold that you can transfer, and the limit varies depending on the IMPS transfer type.

Cross-border Payments & Remittances

The cross-border payments and remittances have made the world smaller, allowing you to trade or provide services internationally. Since such transactions are done through banks, it has an element of safe payments that reduces the risk of non-payment or partial payment.

With the help of APIs, the service can be re-bundled to offer a faster and more manageable payment and remittance experience.

Payroll

Many banks offer payroll services where a company can avail of a direct deposit of the salaries of its employees to their respective bank accounts. The banks also provide reimbursement of expenses, retirement benefit payments, and all other payments directly deposited to the company’s employees’ accounts.

The APIs can help create a process flow that can integrate employees’ details to provide smooth application of the payroll services.

Bills/Recurring Payments

Your monthly bills and recurring payments can be paid using your online banking facilities. Many payment banks also offer such services to pay bills using Unified Payment Interface (UPI) Id from your smartphone.

The Future of Banking

With thousands of APIs in the market and many more new APIs are being introduced rapidly, the banking system is being transformed entirely. The API-enabled technology has made banking functions easily accessible to all, faster than before, and more secure without tampering with your details.

Although banks have been offering these services for many years and have also transformed from physical to digital, there still remains a scope to optimize the services and products provided to make the customer experience smoother and hassle-free. FinTech companies play a huge role in bringing the required transformation on how we perform our banking transactions.

These companies have already rolled up their sleeves by innovating video KYC processes, card-less cash withdrawals, and scan and pay. They have also accelerated their pace to leverage technological advancements.
The future lies in re-bundling the traditional banking products into simpler, effective, and more meaningful banking functions that will fill the gap between the customers’ expectations and the traditional banking services and products.

What’s Next?

The process of unbundling the traditional banking services has been eased with the introduction of APIs. Still, re-bundling these services with new additions to modern banking functions are tricky and requires a good understanding of APIs and the latest banking functions. The process of re-bundling banking services is constant, and it keeps adding more innovative banking products to the list as the technology advances.

In the next module, we will be elaborating on how re-bundling is done and which modern banking functions are in place.

Till then, Happy Banking!

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