With BaaS, the bank can externalize products.
Banks are set to hit as much as 18 per cent of revenues through Banking-as-a-Service (BaaS) partners. The new report looks at the emergence of BaaS as a strategic imperative for Asia/Pacific banks and outlines the eight key components of a good BaaS strategy.
“Seemingly making up for the distraction of the past two years, many banks are poised to go beyond open banking, priming themselves for BaaS. The coming years will be interesting to watch because there now appears to be a spectrum of maturity being created of how “open” banks are, with some experimenters playing in the fringes of open banking while some mature and innovation-focused organizations are succeeding with BaaS,” says Michael Araneta, Associate Vice President, IDC Financial Insights.
Open banking, as initially envisioned, is essentially the sharing of basic financial data of customers to third parties. The sharing of customer data is useful in coming up with an aggregated view of a customer’s financial standing and is beneficial to many parties, such as aggregators, credit bureaus, other banks, and financial service providers that seek to get a share of customers’ wallets.
BaaS, on the other hand, goes beyond the sharing of data as it allows the bank to offer financial products and services from within the distribution channels of nonbank third parties. With BaaS, the bank can externalize products (e.g., debit cards for nonbank third parties can launch their own loyalty cards, white-labelling the bank’s debit cards), financial services (e.g., the bank can fund a buy-now-pay-later [BNPL] transaction on an e-commerce site), or services (e.g., identity authentication for an e-commerce transaction). BaaS brings banks to a much larger playing field than open banking, requiring banks to have more mature approaches to technology, innovation, the creation of business partnerships, and the design of business models.
As different banks approach openness differently, some strategies might include white-labelled banking, embedded finance (offering a financial service at the point of need of the customer), lifestyle banking, ecosystem banking, and platform banking (when a bank offers third-party capabilities on the bank’s own application, channel of distribution, or platform).
“Long before the distraction from open banking — the banks were envisioning close to 15 per cent of partner-generated revenues out of the total, with some regional banks setting their sights on 18 per cent by 2021. In the recovery year, banks are back to the 18 per cent targets,” says Araneta.
Westpac Banking Corporation of Australia is mentioned in the report as a leader in Banking-as-a-Service after it won at the Financial Insights Innovation Awards (FIIA) in 2022. A key reason for the FIIA recognition was how the BaaS platform was set up in 18 months — setting the benchmark for how a bank can stand up its BaaS-ready technology.
Westpac stands out in some of the eight key components of BaaS, particularly in the following:
- There is inherent clout to attract potential partners so that these partners can take advantage of the extensive set of licenses, skills, and experience that Westpac maintains as the longest-running and one of the biggest banks in Australia.
- Westpac maintains a well-defined set of services that can be externalized to partners, such as savings and transaction accounts, and soon, lending products. Westpac’s rapid building of technology capabilities (for example, AI for fraud management and payments) means that it can eventually offer processes and nonfinancial services to partners. New revenue generation sources will also emerge from these services-based offerings.
- A new digital core technology platform that supports scale and increased throughput of transactions as well as provides support for API-based interactions on the platform.