India is seeing an explosion of customer-centred businesses.  

A majority of these players are looking to embed financial services into their platforms.

However, providing banking services to consumers is no piece of cake. 

Thankfully, Banking as a Service (BaaS) platforms can help bridge the gap between companies and banks. 

Keeping this in mind, 4 industry stalwarts, including our co-founder, Akash Sinha, shared views on Banking as a Service on a roundtable discussion at the Global Fintech Fest 2021. 

Banking as a Service on a roundtable discussion at the Global Fintech Fest 2021

But before we start, here’s a quick definition of BaaS

Banking as a Service allows BaaS platforms access to the core banking system of legacy banks through APIs.

In turn, this allows fintech and non-financial services enterprises to provide banking services to their customers. For instance, services like accounts, issuing cards, investment, lending, etc. 

Banking as a Service

The Reason Behind Sudden Rise of Banking as a Service

Customer Expectation. 

Believe it or not, this is the primary reason for the rise of Banking as a service. 

Let us explain. (In points, nonetheless!)

  1. Banks have always worked like “super apps”.
    They act as a one-stop platform for a variety of financial services like savings, wealth, mutual funds, insurance and more. 
  1. However, as the GDP of India increases, so does financial literacy. This effectively means that customers use these financial services far more frequently. Now, customers have increased expectations from banks.
  2. However, traditional banks (with their outdated legacy systems) cannot keep up with these expectations. It is virtually impossible for banks to sachetize financial solutions for targeted customer sections at a fast pace.
  3. Enter: Banking as a Service platforms. They build their platform on top of the bank’s legacy system. Thereafter, they use APIs to access the core systems and allow businesses to offer financial services to their customers. 
Banking as a Service: how it works

Now, an interesting by-product of this process is unbundling of financial services.

Speaking of which…

BaaS and Unbundling of Financial Services

Here’s a great parallel to understand how BaaS fuels unbundling. 

One of the earliest social media apps, Facebook can be considered a super app (messenger/image sharing/video calling etc). Much like a bank that offers most financial services on one platform.

However, over time, new apps took over specific aspects. In the process, they unbundled social media services. 

For instance, customers started preferring Instagram for image/video sharing and Whatsapp for messaging. 

Similarly, customers have started preferring third-party apps for financial services like lending, accounts, card issuance, etc. 

But what exactly are the advantages of unbundling?

Well, quite a few.

  1. Unbundling allow better customer experiences for specific products
  2. Encourages frequent uses of financial products. 
  3. Simplifies/Declutters financial products for ease of use
  4. Personalizes financial products for specific segments

Furthermore, BaaS can also aid the acceleration of financial penetration in India. 

Let’s understand how. 

How Can Banking as a Service Aid Financial Inclusion

We know that financial inclusion is an important part of the development process.

But what if we go beyond banks? Can BaaS platforms democratize financial services for the masses?

Experts believe so. 

BaaS platforms drive enterprises to develop user-friendly nimble solutions. For instance, a financial service product propelled by a BAaS platform may have:

  • Easy-to-use interface
  • Localised in diverse languages for higher personalization
  • Tailored financial product

Needless to say, all of these are only possible through Open banking APIs

However, this brings its own set of challenges.

Managing Banking Regulations At The Time Of Open Banking

Experts agree that banks have to be heavily regulated in order for BaaS platforms to offer tailored solutions. 

Banks have to use the required:

  • Fraud and risk management systems
  • Data security measures 
  • Incremental AI and ML security levels on top of the legacy systems

At the same time, BaaS can help digitize or even fast track these regulation processes for fintech and end customers alike

Here are two examples to illustrate:

  • Making international payouts may require a lot of documentation and approvals. FIRC, for one.
    Here, platforms like Cashfree Payments can use their resources to simplify the process for merchants. For instance, Cashfree’s banking provider FIRC to the beneficiary of international payments automatically.
  • Another example is that of an end customer sending international payments. The process of sending funds itself requires the customer to sign various legal documents. In such a situation, a BaaS fuelled fintech may be able to help these customers send international funds instantly.

Now, it’s important to note that Indian regulatory authorities are very supportive of innovation and new players in the market. Moves like innovation sandboxes are testament to the same.

However, there’s still a long way to go. 

For instance, we still need to discuss the possibility of:

  • Digitization of payments, onboarding, underwriting procedures and KYC. 
  • UPI-like infrastructure that facilitates interoperability. Especially for segments like credit.
  • Balancing the onus on compliance between banks and fintech players.

All things considered, the future of fintech innovation looks hopeful. And a LOT of it will depend on the use and evolution of banking as a service.

What are your thoughts on the future of BaaS? Can it be a driving factor of Indian financial inclusion?

Let us know in the comments below!

Banking as a Service