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How Banking as a Service (BaaS) unlocks opportunity for the banking sector

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Amit Dua, President, SunTec

As Banking as a Service (BaaS) nears mainstream adoption, there is a significant opportunity for banks to join the BaaS ecosystem, develop new relationships with fintech firms and create new revenue streams for themselves at the same time.

The mobile industry is one sector where we will see BaaS flourish and become readily adopted by mobile providers, fintech firms and banks. Smartphones [and there are about 6.6 billion globally] have given people access to instant communication and the financial services industry is beginning to understand that by offering smartphone users BaaS, they can facilitate day to day living and help families and businesses financially plan for everything from long-term goals to unexpected emergencies.

Most of the mobile operators around the world only offer the ability to make payments via phones but they don’t offer people access to banking – that is about approximately 1.2 billion people worldwide who want access to savings accounts and insurance for example, both of which BaaS can enable.

If those that don’t currently have a bank account were to open one, they would be more likely to use other financial services such as credit and insurance. They might even start or expand their businesses, invest in education and health, manage risks and weather financial shocks, all of which are likely to improve the overall quality of their lives. So, if a bank offers BaaS services to mobile phone operators for example, it would encourage financial inclusion, which, according to the World Bank Group, has been identified as an enabler to reduce extreme poverty, boost shared prosperity, and to achieve 7 of the 17 Sustainable Development Goals. HM Queen Maxima of the Netherlands, the UN Special Advocate for financial inclusion worldwide, attended SIBOS 2022 to underline its importance in the world, explaining that “the rapid growth in mobile phone use and new customer data trails offer exciting new ways to deliver financial products by leveraging big data and AI – especially in emerging markets,” where many people are unbanked or underbanked. BaaS, while in its early stage of evolution, is fast becoming part of our day to day lives. As consumers, we are used to using apps such as UBER to pay for things and once our payment methods are established the process is frictionless. We moved from cash to card and now to digital payments with relative ease and our spending has probably increased as a result. Overall, all the players in the BaaS system will benefit – the BaaS provider (the bank), the technology company with a banking licence and the charter or fintech in the middle as well as the end consumer.

The long-term benefits of BaaS far outweigh any short term challenges

The business of banking is moving out of the exclusive realm of banks and into a comprehensive ecosystem to bring personalized, customer-centric offerings to market faster. This is what BaaS can achieve if banks are prepared to embrace it, and it can enable them to reach out to many more customers, bring up their economies of scale and bring down their costs. Accessing the data captured via BaaS leads to more personalized services and better customer relationship management and retention.

As BaaS becomes more mainstream, the regulators have noticed. Neobanks and fintech firms are providing a seamless digital banking experience and they need a bank to offer cards, lending, money transfers, and other banking services. Fintech firms also have limited experience with compliance processes. A BaaS model, therefore, becomes critical in a highly regulated and competitive market. Banks have responded by enabling fintech firms and neobanks to have a bank’s resources and infrastructure to expand their offerings while lowering operating costs.

Another challenge with offering banking services through APIs is that it increases the risk of cyberattacks and security breaches if not carefully managed. Technical and operational constraints, like legacy infrastructure can delay implementations and may require costly manual processes to overcome the limitations. In addition, banks must sustain the efforts to add new fintech partners to the portfolio. Banks can further align their business models and reduce the risks by partnering with an experienced fintech provider that offers a secure digital layer which can integrate seamlessly with multiple systems and offer end-to-end connection of business data.

Despite some challenges however, BaaS still brings many benefits to the financial services sector and it’s the customer who is rightly the biggest beneficiary of these advancements. With BaaS, they have more choices and are able to enjoy the full experience of, for example, buying their own house, rather than simply getting a mortgage from a bank. Overall, the whole ecosystem benefits because there is more value creation that is happening via BaaS.

BaaS is developing globally

BaaS is in its infancy, but adoption is growing. In the US lots of BaaS providers are emerging because it’s so much harder to get a banking licence there than it is in Europe. The UK granted the maximum number of licences in the world in the last ten years but, if you can’t get a licence, and want to consume banking services, for example making payments or securing loans, you must rely on someone who does have a licence. That company can ‘squeeze the juice’ fully out of the charter and take full advantage of it.

In Asia, there are very interesting cases emerging for example in Indonesia. An enterprise software supplier which provides software for managing gyms must allow the management of memberships, heavy machinery or equipment and payment processing. The gym chain along with a bank (with a licence) becomes a BaaS provider.

Without a doubt, customer expectations have changed. They want contextual, hyper-personalized, integrated banking experiences and on-demand access to banking services. They want to access banking products and services when they need them, so BaaS presents a new opportunity for financial institutions to acquire customers at lower cost, reach new customer demographics, grow revenues and deliver customer satisfaction.

Banking

How banks can help customers during the cost of living crisis

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 Lavanya Kaul Head of BFSI, UK & Ireland, LTI Mindtree

 

Surging energy and food prices are significantly driving up household expenditure, which means living standards in the UK will fall to 2.2% this year, according to the Office for Budget Responsibility. This is the biggest drop in any single financial year since the records began in 1956-57.

It’s a tough situation for many consumers who are still struggling with financial hardship following redundancies and pay freezes from the pandemic. According to TSB’s Money Confidence Barometer, 82% of people have experienced an increase in the day-to-day cost of living. This resulted in almost a quarter of them using their savings, while one in five changed their usual spending habits and behaviours.

As the financial situation worsens, consumers are increasingly relying on their banks for help and support. But, while banks can’t control inflation, energy or food prices, they can play a more supportive role by adapting their services to offer stronger customer service, better tools for financial management and be more flexible with loan repayments.

 

Strengthen customer service with intuitive AI solutions

Since the pandemic, consumers have changed the way they bank, using more mobile apps for primary banking rather than going into physical branches. This provided an opportunity for banks to accelerate their investment in digital services including automation and offer customers more support during the cost of living crisis.

Lavanya Kaul

Effective tools include AI-powered chatbots which respond intelligently to customer enquiries to quickly help troubleshoot problems and provide useful advice. But to be successful, you need to ensure you strike the right balance between an efficient and convenient process and creating a personalised experience. Customers need to feel like you understand and care about their problems and are here to help, rather than just fobbing them off with a monosyllabic bot. To avoid this, banks need to embrace intuitive AI solutions to ensure that empathy comes across in all automated interactions with customers. While doing that, messaging is key. In times of stress, we don’t function as well and financial struggles are a huge stressor. The clearer the message and the simpler the instructions, the better.

Financial education, when combined with technology solutions such as open banking, can offer more long-term solutions for people to navigate their finances. This can help put more information into the hands of the consumer to help them grasp their financial situation better. Some banks have cracked this with innovative solutions like HSBC’s Financial fitness score tool that can analyse your money habits and signpost you towards ways to improve your financial health. This may include joining one of the financial education webinars run by the bank or having a ‘financial health check’ with a member of staff.

 

Launch money management features & apps

Introducing money management features and apps to increase the visibility of a customer’s financial situation, empowers them with the information they need to make smarter choices.

TSB offers Spend & Save and Spend & Save Plus current accounts which include a savings pot that enables customers to put extra money aside when they can and an auto-balancer feature that automatically transfers money from the savings pot into their current account if their balance falls below a certain level. This allows them to start building up savings and protects them from unnecessary overdraft charges.

Personal financial management (PFM) apps also help customers get a better understanding of their finances. These connect with a customer’s bank account and enable them to keep a close eye on their spending habits and track upcoming bill payments. An example is Prism, a PFM app which allows customers to manage bill payments by sending them reminders about due dates. It also provides a summary of their income, account balance and monthly expenses at a glance, therefore consolidating all their financial information in one place and saving time on bill payments.

Lloyd’s Banking Group and HSBC launched a subscription management tool for all customers on mobile, allowing them to see and cancel recurring card payments for things like TV subscription services. HSBC says that during the first quarter of the year, it led to customers dumping around 200,000 subscriptions.

 

Introduce payment holidays

While improved customer service and financial management tools are important support tactics, they might not be enough for more vulnerable customers. For example, those who are about to default on mortgage payments or loans due to redundancy or periods of ill health need banks to do more, like offering payment holidays. Banks relaxed the rules for payment holidays during the pandemic, so they should consider doing it again to help more vulnerable customers through the crisis. Customers need to understand that they are not alone when experiencing financial difficulties and that help is available

 

Ride out the crisis together

As inflation reaches a 30-year high, customers are now more reliant than ever on banks for guidance and support. But to provide the right level of service, they need to move away from their traditional ways and behave more like technology companies by embracing automated solutions to create the right products and services for customers. Then layer on top of that the need for more personalised and empathetic customer interactions, as well as consider additional support for more vulnerable customers.

While we don’t know how long the cost of living crisis will last, what we do know is that the pressure on household finances is likely to get worse before it gets better. Therefore, banks need to step up, be the supportive partner and do whatever they can to help customers. After all, the only way we can ride out the crisis is by supporting each other and working together.

 

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Banking

Coreless Banking: How banks can thrive in 2023

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By

Hans Tesselaar, Executive Director of BIAN

 

In recent years, banks have faced immense disruption and struggled to transform with technology. In fact, our research with IBM found that 88% of banking executives are troubled by their bank’s commitments to multi-year projects, interoperability across technology environments and theft of sensitive data. A lack of industry standards is also causing significant problems and hindering the organisation’s ability to bring new services, at the desired speed, to market.

While banks have made significant advancements in recent years, in order to truly embrace digital transformation throughout the industry,and meet the needs of today’s digital first-customer, banks must focus on adopting a coreless banking model.

In 2023, coreless banking approach will enable the delivery of banking services that aren’t longer dependent on legacy systems, and will support the digital-first customer, bringing real transformation to the industry.

Hans Tesselaar

Putting the Customer First

Without the comprehensive digital infrastructure necessary for today’s environment, financial services organisations are unable to bring services to market as quickly and efficiently as they would like – and need. The extensive use of legacy technology within banks meant that the speed at which these established institutions could bring new services to life was often too slow and outdated. This challenge is also complicated by a lack of industry standards, meaning banks continue to be restricted by having to choose partners based on their language and the way they would work alongside their existing ecosystem. This is instead of their functionality and the way they’re able to transform the bank.

To move forward into the ‘digital era’ and continue on the path to true digitisation, banks need to overcome these obstacles surrounding interoperability. Additionally, with today’s digital-first customer in mind, financial institutions need to take advantage of faster and more cost-effective development of services. Failing to provide these services may force customers to take their business elsewhere. One thing is certain, consumers will continue to prioritise organisations that can offer services aligned to both their lifestyle and needs.

Coreless Banking 

The concept of a ‘Coreless Banking’ platform is one that supports banks in modernising the core banking infrastructure.

This empowers banks to select the software vendors needed to obtain the best-of-breed for each application area without worrying about interoperability and being constrained to those service providers that operate within their language. By translating each proprietary message into one standard message model, communication between financial services is, therefore, significantly enhanced, ensuring that each solution can seamlessly connect and exchange data.

With the capacity to be reused and utilised from day one, and the ability to be used by other institutions, Coreless Banking provides these endless opportunities for financial services industries to connect, collaborate and upgrade.

Banking in 2023 and Beyond

Throughout 2023, banks must prioritise their digital transformation journey and adopt a Coreless Banking model. This approach will empower technology leaders to tackle problems head-on knowing they aren’t tied down by the usual restraints caused by outdated legacy systems.

After the last few years, it is impossible to predict what is around the corner, but banks will rest easier knowing their architecture can modernise and change as needed with a Coreless Banking model.

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