Banking-as-a-Service: the story so far, and where we go next  

Marouane Bakhtar, UK Managing DirectorSynpulse  


Although fintech funding overall has slowed considerably in the past six months, Banking-as-a-Service (or ‘BaaS’) startups have remained an attractive target for acquisitions and investments in 2023 so far (Source)Above deal volume, we should also note the quality and banking expertise of those buyers and investors – which include specialised PE and VC firms, plus established banking brands.  

Indications suggest that the market is still confident that BaaS is going to be a major revenue stream for the financial services (FS) players of the future. But how will this innovation fit into a long-established banking market like the UK?  

Setting the scene 

Digitalisation has revolutionised the banking world in recent decades. From individual development in the early days to today’s era of banking-as-a-service, banks have continuously evolved to meet the increasing demands of modern banking.  

The 1960s to 1980s were characterised by individual development in banking. During this phase, banks built their own core banking systems that provided basic functions for processing transactions. These systems were mostly developed internally and operated on mainframe computers. At that time, security was still subordinate and data processing was slow and fragmented. 

In the 1980s, the phase of standard software began. The banks recognised the inefficiency of in-house developments and resorted to commercialised solutions. It was not until the 1990s that banks increasingly focused on more open, flexible and customer-oriented core banking systems. This has resulted in a banking ecosystem that is especially complex, layered, and filled with regulatory expectations.  

The Airbnb moment 

With the advent of the internet and advancing digitalisation, the era of Software-as-a-Service (SaaS) began in banking. From 2000 to 2020, banks began offering innovative financial services competitively and developing new products quickly and cost-effectively. The architecture of such core banking systems was open, scalable, adaptable, lean and fast. Cloud technologies enabled a flexible infrastructure, which is why resources could be scaled quickly and used efficiently. 

However, a tide is turning. In the hotel world, this was seen as Airbnb grew rapidly in scale. From being one of many platforms with a niche and informal community, Airbnb became the platform, with a full suite of professional home-letter and home-stayer tools. Entire new industries like professional Airbnb lettings management sprung up around it. Airbnb became the controlling centre of its own ecosystem.  

The same upheaval is about to happen in the banking world. This places us at the threshold of a new era: with banking-as-a-service and platform-as-a-service at the centre. Platforms will undoubtedly dominate the future of banking.  

The central reason is simple. End customers need banking services, even if banks do not look the same as they did a few years ago. From a consumer perspective, platforms can be convenient because they offer simplicity, choice of products, and new tech-driven features which fit easily into their everyday lives. For example, having bank accounts from multiple banks visible in one app, aggregated by trusted providers with systems exchanging information using an agreed, secure standard.  

Using BaaS to build the banks of the future 

Banking-as-a-service offers the possibility to provide financial services via application programming interfaces (APIs) and to integrate them seamlessly with other systems. This will allow FS providers to offer banking services themselves as well as help other companies embed banking services into their products and services. 

Moving ahead of the curve gives banks the chance to differentiate themselves and maintain customer retention. In a world of rising interest rates and a squeeze on operating margins, maximising customer retention and lifetime is essential to long-term stability Especially as Gen Z customers (born from 1990-2010) open their first adult current accountsbanks need to offer the innovative and intuitive banking experience that will ensure them as customers for life.  

Using the BaaS model enables banks to bring new concepts to market maturity quicker. Using prefabricated modules and APIs as building blocks can help banks to keep up with evolving financial service needs of customers. This makes more time for team leaders to focus on core strategic priorities for the bank’s long-term strategy.  

There are also several operational advantages for banks in the platform model. With banking-as-a-service solutions, data is managed in a centralised way, which enables more efficient data management. At the same time, there is no longer a need for programming to make solutions configurable, because existing available solutions are easily customisable. However, because everything is connected, banks don’t miss out on valuable customer insights and the opportunity to design personalised services which align with the bank’s brand and business strategy. 

Using BaaS to move from competition to co-petition 

As we saw in the Airbnb example above, digitalisation and a shift in the ‘centre’ of an industry’s ecosystem can cause major upheaval and disruption. Similarly in the financial services world, fintechs and alternate finance options like peer-to-peer lending have started competing with legacy banks. Competition and pressure to innovate have increased in both sectors, creating new opportunities for consumers and businesses alike.  

But the next stage of the journey, moving towards a platform-based ecosystem, is likely to be more complicated than simple head-on competition. This is because the nature of the model itself demands some level of integration and data sharing to work. This means that financial services organisations of all sizes and specialties need to be ‘in it to win it’.  

Moving forward, instead of the race to scale there will be a race to integrate. Rather than building their own customer bases in siloes, fintechs are likely to look towards key players like banks and Big Tech companies to create partnerships of mutual benefit and scale their customer bases together.  

The emergence of an ecosystem-based future   

Banking-as-a-Service is proving to be a transformative force in the banking world. The shift from in-house development to cloud-based infrastructure is changing the way banks deliver their services and interact with their customers.  

What is now needed is a clear way for FS players across the market to collaborate together on providing the next generation of services. All participants in the ecosystem – banks, fintechs, asset managers, credit factories, payment transaction processors, brokers, custodians, data providers – can benefit from common economies of scale and standards. What is needed is for early adopters to keep up the momentum of this transition. In the meantime, financial services players are best placed to hedge their bets and integrate widely, positioning themselves for the emergence of the next banking ecosystem.  

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