Unbundling the Bank: How Banking-as-a-Service is transforming Indian financial services

While COVID dramatically impacted traditional banking, it has also helped digital banking to gain rapid acceptance. Meanwhile, Indian FinTechs are flourishing and touching almost every banking value proposition.

With the government’s push towards increasing funding for digital initiatives ($2Bn+ in 2020), we will inevitably witness more digital financial products in the future. This also means that traditional banks are losing customers to digital competitors while continuing to spend on infrastructure. However, we have also witnessed several examples of traditional and finTech collaboration led success stories:

• State Bank of India partnership with Uber to provide vehicle finance to drivers
• RBL Bank collaboration with Razorpay for digital merchant onboarding and payment solutions
• Snapdeal and Freecharge partnership with Yes Bank to provide “instant refunds”

Most collaborations such as these are only possible as a result of banks allowing access to their technology and data to be used by external parties. This phenomenon is popularly known as Banking-a-as-a-Service (BaaS).

What is BaaS?

BaaS describes the individual products or capabilities that are created via unbundling of banking infrastructure and allow access via their APIs to facilitate specific banking functions (loans, cards, deposits, insurance, payments, etc.) in a marketplace model. These APIs and the data they provide access to can be utilized by FinTechs or any other third party running a digital platform to build new and innovative financial solutions that address specific customer needs.

Is BaaS a fad?

BaaS is not a new phenomenon that emerged in response to COVID. Its origins date back to 2012 when French bank Credit Agricole unveiled its app marketplace. In India, Yes Bank and RBL Bank pioneered BaaS in 2013 by opening several APIs to developers. Later, many major banks like Citibank, JPMC, Wells Fargo, and Barclays launched their API developer portal/hubs. Currently, in India, API offerings exist from all major private banks like HDFC, ICICI, and Kotak, while multiple BaaS FinTech startups like Zeta, Setu, and Yap are growing rapidly with increased funding. While incumbents were opening up their APIs, a new batch of Challengers and Neo banks have established themselves with digital as core to their business. Arguably the most notable success story in the Indian retail banking space is PayTM and the rise of OPEN, a financial services provider with over 1 million business subscribers in India for startups and small businesses.

BaaS creating a paradigm shift for customer intimacy

The benefits of adopting a BaaS model go beyond the monetization of existing infrastructure or increasing customer reach. It’s about solving the ultimate customer need for which banking services are required. Traditional banks have spent a lot to improve the customer experience both online and offline. Their focus was always to improve the customer touchpoint with the banking system through digital processes like digital account opening and loan origination, etc. Though future customer intimacy will be created by addressing end-to-end customer needs like starting a business or purchasing an asset where a bank account or mortgage will be an embedded enabler.

Here are examples of how established Indian Banks are utilizing BaaS to better serve customer needs:
RBL is collaborating with Bajaj Finance to give vehicle loans across India, utilizing RBL’s secure and compliant digital infrastructure and Bajaj Finance’s pan-India reach to help customers with finance and purchases all in one place.

OPEN, a financial provider, uses ICICI Bank APIs to provide credit options to manage vendor payments, billing and accounting for startups.

This is just the start of immense possibilities for embedded finance in every customer journey. Customer expectations are changing rapidly. Banks need to think beyond putting customers into classic, gold, or platinum segments and market segment-specific banking services.

Why are public sector big banks lagging in BaaS adoption?

To maximize BaaS benefits, banks need to transform their infrastructure into a composable Lego-like architecture where every block denotes a banking functionality consumed via an API.

To technically achieve such flexibility, banks need to modernize their core banking system which can be a tedious task and requires investment. Though multiple system integrators have skills and solution accelerators to expedite this change, choosing the right partner is key.

At the organizational level, a product-centric approach is required for each banking function, rather than different teams managing the front end, backend, data, and infrastructure.

Finally, from a regulatory perspective, the government has a key role to facilitate BaaS adoption. European countries have already pioneered PDS2 and open banking regulations. Major banks such as HSBC and JPMC with solution providers like Salesforce created a non-profit consortium – BIAN (Banking Industry Architecture Network) which is conceptualizing standardized banking architectures.

Unfortunately, in India, data privacy and BaaS regulations have yet to be formulated. Regulatory regimes are important to improve both customer trust and sharing of best practices. It will also help de-risk innovation protecting smaller players to avoid incidents like the broken PhonePe app when its BaaS provider, Yes Bank, was put under moratorium by RBI due to NPA issues last year.

BaaS Future – Threats and Opportunities:

As BaaS adoption prevails, banks will need to focus on avoiding commoditization. Consider a future where there is a marketplace of open APIs from different banks. End customers will never know which banking API is being leveraged in the backend and thus customer affinity will be established with the service provider – not necessarily the financial institution enabling it. Hence, creating an open banking API ecosystem is not the end goal but just the start. BaaS offerings should be unique to every banking provider’s business needs. Instead of an API marketplace, banks can create white label end-to-end financial solutions with ownership of data or co-brand the entire solution, such as the co-branded RBL-Bajaj Finserv Credit Cards or remittance services provided by TransferWise to many neo-banks.

More than ever before, BaaS will require banks to strategize where in-house services are required and where partner ecosystems can be used. And, annual budget and sales targets will need to be structured accordingly.

Finally, Banking leadership needs to incorporate deeper technology understanding and decision making to construct the right strategy backed by sufficient investment and a partner ecosystem to leapfrog ahead of the competition. It is an interesting time to watch how the ancient business of banking reshapes itself through technology-enabled ecosystems.

This post was originally published in The Economic Times.