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BaaS, Baap & Open Banking: Step forward in the future

baas baap open banking
source: internal

In an era of Industrial revolution 4.0 wherein data is the king and customers service expectations are much more evolved than ever in the past; innovation, access & affordability of the right product is the key to the success. Financial services and banking are no alien to this and BaaS, Baap & Open Banking are few of the new innovations which is expected to change the delivery experience for the customer.

BaaS or Banking as a Service helps extract the synergies of a smaller fintech brimming with innovation but lacking financial and regulatory muscle and that of a bank which is bothered with bureaucratic policies thanks to long lineage but has all the monetary and compliance support. The smaller or inter-industry partner rely on the backend support of the bank for the financial transactions which creating a full layer of application on top of it (or seamless integrating it to the existing model).

bank as a service explained e1616059656858
source: sepa-cyber.com

Open Banking is similar to an extent to the BaaS wherein the TPP (Third party partners) uses the Bank open API to access the banking details of the customer either only for informational or for the transactional purposes. Across the world, the Open Banking norms are being accepted and imbibed by the banks. One of the good example of an open banking module is UPI & Bank details on a third party app like Google pay. Customers can check their bank balance directly from the Google pay app (Open Banking – Informational) or may pay for the merchant directly through the app. The growth path is the right testimony of the potential of the sector. Similar to BaaS, the usage of open banking outreaches significantly across sectors and economies.

upi chart
Source: ET
authentication flow open banking
Source: juanstoppa

There are various common advantages for BaaS & Open Banking:

  • Access to Customer information and banking details of the bank
  • Opportunity to feed in newer and innovative products
  • Cost saving in terms of setting inhouse IT & manpower
  • BaaS helps with the regulatory and compliance requirements as the functions are still residing with Bank
  • Opportunity to touch base with existing bank customers with open banking

The major difference between open banking and BaaS is that while Open Banking just allows the Banking information to be shared with the partner with customer consent while BaaS allows for full stack development over the Bank API. Open banking is the framework for the BaaS to develop & grow.

Few use cases for Open Banking:

  • Transactional information like statement
  • Aggregating financial information
  • Insurance
  • Kyc

Few Use cases for BaaS

  • White level credit card
  • BNPL
  • Insurance
  • E-commerce
  • Insurance
  • Lending

Banking as a Platform or Platform Banking is almost inverse of BaaS and is a great tool for banks to diversify customer offerings while at the same time, for smaller players to gain access to customer within the banking ecosystem. Banks connect to the TPP through their API and offer customers these product through their internal channels. One of the good example of this would be Insurance being sold through banking products with integrated API.

Source: A Vision for Platform-Based Banking, https://www.ey.com/Publication/vwLUAssets/ey-a-vision-for-platform-based-banking/$File/ey-a-vision-for-platform-based-banking.pdf
banking as platform vs service
source: David Jiménez Maireles on Twitter

There has been a continuous growth in these fields and with the increase use of enterprise blockchain integration, the opportunity and scale has grown multi-fold. The higher acceptance of open banking by existing players will further open up the newer segments for next stage of growth.

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