Banking as a service is transforming the sector’s staid processes

Keep­ing up with bank­ing can feel like try­ing to watch a Star Wars spin-off with too many char­ac­ters. The lat­est cohort of fin­tech inno­va­tors includes Ordo, Kasko, Mantl, Kani, and Tuum (respec­tive­ly a pay­ment proces­sor, prod­uct dis­trib­u­tor, cus­tomer onboard­er, rec­on­cil­i­a­tion spe­cial­ist, and a core bank­ing provider). 

The ecosys­tem is bulging with star­tups with colour­ful names but a sim­i­lar premise: offer­ing a cloud-host­ed ser­vice, con­nect­ed via an API, to offer some­thing the bank can’t build inter­nal­ly. 

Bio­Catch is a great exam­ple. It mon­i­tors behav­iour­al pat­terns to dis­tin­guish between users and crim­i­nals. In the first half of 2021 in the UK, crim­i­nals stole £754m through fraud, a rise of more than a quar­ter, so banks are keen to explore any tech they can find. Bio­Catch is thus boom­ing, sign­ing up 62 cus­tomers includ­ing Bar­clays, Citi Ven­tures and HSBC. Bio­Catch is cloud-host­ed, so there is noth­ing for the banks to run or main­tain. They sim­ply con­nect via an Appli­ca­tion Pro­gram­ming Inter­face (API).

If banks need, they can out­source every aspect of oper­a­tions. Options include Thought Machine for the core oper­at­ing sys­tem, Jumio for AI ver­i­fi­ca­tion, Fin­te­chOS for the onboard­ing inter­face, Feedzai for fraud detec­tion and so on. A sys­tems inte­gra­tor such as Syn­pulse or GFT will build the entire thing if need­ed. 

It has led to an anal­o­gy with LEGO. The parts snap togeth­er. If a block isn’t work­ing well, rip it out and replace. 

Overcoming bureaucracy

The chal­lenge for the indus­try is to assess how well this works in prac­tice. Invest­ments in fin­tech aver­age $170bn (£135bn) a year. If banks are offered ser­vices but are reluc­tant to exper­i­ment with plug-and-play providers, a lot of that VC cash will be wast­ed.

The speed of adop­tion can be exag­ger­at­ed. “The actu­al con­nec­tiv­i­ty is straight­for­ward,” says Michael Mueller, CEO of Form3, one of the most high-pro­file cloud-native pay­ment proces­sors for banks such as Lloyds, Bar­clays and N26. “We have had clients who received access to our API in the morn­ing, and they man­aged to get con­nect­ed in the after­noon.” Yet the time­line is con­sid­er­ably longer. 

“Banks are prob­a­bly as con­ser­v­a­tive as they’ve ever been,” Mueller says. “But that con­ser­vatism is not nec­es­sar­i­ly root­ed in the bank itself, but in the envi­ron­ment that they are oper­at­ing in. All our bank cus­tomers must adhere to strict secu­ri­ty, cer­ti­fi­ca­tion and audit cri­te­ria. There is no time for risk when deal­ing with pay­ments that dri­ve the glob­al econ­o­my.”

Delays can be frus­trat­ing to fin­tech providers, who are keen to con­nect to banks as fast as pos­si­ble. Ivan Maryasin, co-founder and CEO of Monite, a Berlin-based provider of embed­ded finance sys­tems to banks, con­firms there are seri­ous delays: “The typ­i­cal expe­ri­ence for most fin­techs is for a deal with a bank to take 12 to 18 months for some­thing that the deci­sion-mak­er already approved to mate­ri­alise. There are all kinds of addi­tion­al steps such as due dili­gence, legal com­pli­ance, and the list goes on.”

Often, it’s just point­less bureau­cra­cy, says Maryasin. “Cur­rent­ly, it feels there are thou­sands of unnec­es­sary steps in that process and peo­ple from all sorts of depart­ments become involved, even if they will lat­er have noth­ing to do with the ser­vice what­so­ev­er. In the worst case, it pre­vents them from improv­ing the ser­vice. At best, it mas­sive­ly slows inte­gra­tion.”

Neobanks are faster in con­nect­ing to third-par­ty ser­vices, prov­ing how much tra­di­tion­al banks could improve their per­for­mance. “Neobanks are the ones that are very close to this LEGO con­cept, built from com­pos­able blocks and using a lot of their infra­struc­ture as a ser­vice. And this gives the oppor­tu­ni­ty to grow very fast and sur­pass tra­di­tion­al banks,” Maryasin observes.

How to accelerate the rate of adoption

Three things may accel­er­ate the rate of adop­tion of new cloud-host­ed ser­vices. First is com­pe­ti­tion from fast-mov­ing neobanks. Sec­ond, is the atti­tude of reg­u­la­tors, who are increas­ing­ly com­fort­able with cloud-host­ed inno­va­tion. And the third is the matu­ri­ty of banks in deal­ing with API-con­nect­ed ser­vices – this mod­el is the new nor­mal. 

“Bank­ing is becom­ing more exper­i­men­tal, but we’re still in the ear­ly stages,” says Iana Dim­itro­va, CEO of Open­Payd, which offers bank­ing and pay­ments via an API. “The real exper­i­men­ta­tion and inno­va­tion will come in the next few years.”

She says the poten­tial is there for tru­ly rapid iter­a­tion. “Bank­ing-as-a-Ser­vice providers real­ly can con­nect their clients in a mat­ter of days,” she says. “I would com­pare bank­ing tech­nol­o­gy to elec­tric­i­ty. A hun­dred years ago, if you want­ed a light­bulb in your house it took a team of work­ers to install all the wiring, sock­ets, con­nec­tions and bulbs you need­ed. Today an elec­tri­cian can do the same job in under an hour; every com­po­nent and process has been stan­dard­ised. This is the change that bank­ing has gone through in the last decade.”

Ulti­mate­ly, the rise of plug and play for bank­ing will reshape what it means to be a bank. We are on the cusp of true com­pos­abil­i­ty, where an entire organ­i­sa­tion is com­posed of third-par­ty ser­vices, with all parts able to be switched out. When Ban­ca Medi­olanum Group launched Flowe, a new dig­i­tal-only bank for younger cus­tomers, it did so using a com­pos­able bank­ing struc­ture based on a core-bank­ing sys­tem pro­vid­ed by Temenos. It went live in just five months and attract­ed 600,000 cus­tomers in its first half year. 

Varo Bank, anoth­er tech-first dig­i­tal bank in the US, claims to run at 25% of the cost of a tra­di­tion­al bank by a sim­i­lar approach. It attract­ed 4 mil­lion cus­tomers in its first 13 months.

Bank­ing is awash with bril­liant new ser­vices, from core bank­ing and pay­ments to AI fraud detec­tion and auto­mat­ed ID. The chal­lenge for banks is to accel­er­ate the adop­tion cycle to make the most of these oppor­tu­ni­ties. There is a galaxy of inno­va­tion out there just wait­ing to be explored.