Banking as a Service

Are Banks and FinTechs pure competitors, or can they collaborate as well? The answer lies in a mutually beneficial partnership, compete where they need to compete and collaborate where possible by harnessing the strengths of both sides. This balance between competition and collaboration is the key to the potential success of this model.

One such concept is Banking as a Service (BaaS), a model that places the customer at the center. It's not just about delivering banking products and services, but about ensuring their convenience and satisfaction. BaaS is designed with the customer in mind, and this customer-centric approach is a key strength of this model.

The new age companies come with the perspective of technology first and experience first offering. On the other hand, banks come with a rich experience of trust and compliance frameworks. For example, new fintech players offer a digital-first banking experience, with features like account aggregation and more straightforward financial management tools. Still, they may need more security, data protection and compliance measures, which a bank provides.

The union of the two, banks and FinTechs, not only provides customers with the best of both worlds but also opens a world of innovation. This integration with non-banking businesses and regulated financial infrastructure allows for the rapid introduction of specialized offerings, catering to the emerging needs of the customers and, indirectly, the emerging economy. The potential for innovation in this collaboration is truly exciting.

The agility and specificity of these new propositions are reshaping the market, displacing established offerings, and re-inventing the traditional banking value chain. In addition, it provides an opportunity for both entities to understand the different perspectives. The collaborative offering provides the customer seamless and more customer-friendly processes without compromising the regulatory aspects that protect the customers.

The Banking-as-a-Service (BaaS) model has significantly shifted over the last decade. Initially, traditional banking was the dominant model, where banks provided all banking services directly to customers. However, with the rise of technology and changing customer expectations, the industry has shifted towards open banking and BaaS. BaaS allows the customer to reach the bank through the medium of their choice without compromising security and other aspects. India's banking-as-a-service (BaaS) market size is expected to reach nearly US$ 30.19 billion by 2030. Traditional banks have dominated the financial services landscape, directly offering core services like account management, loans, investments, and cash management. However, through BaaS, non-bank companies can now integrate financial functionalities into their platforms. BaaS allows ride-sharing apps to offer in-app payments, FinTech companies to provide specialized loans, and retailers to create co-branded credit cards. Thus, BaaS is a model in which banks offer their services to their customers on the platform of their choice.

BaaS becomes a path to Open Banking. It will increase transparency and customer control over financial data allowing customers to securely share their financial information using application programming interfaces (APIs) with authorized third-party providers. It has enabled the development of innovative financial products and services like automated budgeting tools, tailored loan options, account aggregation apps, etc., leading to increased competition in the market. BaaS allows for more efficient use of resources and fosters innovation to enter the market, creating new approaches and services that traditional banks may have yet to consider.

Mr. Abhijit Singh

Group Head – Banking as a Service (BaaS), Digital Ecosystem Banking and International Banking

HDFC Bank