NOVEMBER 8, 2022
9 min read
Up until more recently, traditional banks and reputable financial institutions were the only way for individuals to gain access to any type of financial service, whether payments, transfers, or loans. Monopoly and a lack of relentless competition almost completely excluded terms like “value-added” or “custom banking software development services” from the typical banking practice.
Fintech firms and non-banking businesses have added a whole new level of software development in banking industry, which used to be rather reticent to emerging technologies. They have streamlined and simplified operations, diversified their service offerings, and complemented it all with convenience and friendliness. Consequently, they’ve started to encroach on a piece of the financial pie—an industry that had always been distributed between the same organizations.
Even though innovations tend to go ahead and push regulatory changes more often, these days the situation is far different. The experiences created by such companies as Amazon, Facebook, and Apple, in combination with the newly-introduced Open Banking API and PSD2 regulations, bring people up to speed on the type of relationship they want to have with their banks. And as we all know, demand is the best trigger for the future of banking.
The API-Driven Evolution And the Introduction of Banking as a Service
These days, banks make much investment in creating a robust infrastructure and modernizing their legacy systems to meet customer needs and protect their market share. However, it’s not an easy and straightforward way that is also encumbered with the need to promote and maintain tough compliance measures, as well as take out licenses.
Non-bank institutions, together with fintech firms, find it easier for banks to partner with external companies than to create a banking software from scratch. Meanwhile, this is the key goal of the Open Banking initiative and the central functionality of the banking software as a service. But first things first, let’s start by answering a simple question: “What is banking-as-a-service?”
BaaS, or Banking as a Service, is a full-fledged technology that enables fintech startups and other firms to link to core banking system software through APIs and create financial offerings on the basis of the providers’ well-regulated infrastructure.
In fact, end-to-end BaaS platforms allow banks to bridge the gap between their obsolete back-end software and modern customer-facing experiences. Financial incumbents of all sizes get an opportunity to improve and develop a banking software quickly and securely, thus generating innovative revenue streams, launching ground-breaking services tailored to the needs of their clients and employees, and attracting new audiences.
What Is the Difference: Open Banking, Open API, Banking as a Platform, Whitelabel Banking, And Banking as a Service Platform
Being aware of all the new developments and achievements in online banking services, it comes as no surprise that most people are still confused about the terms and definitions. To help you avoid ambiguity, we’ve created a short glossary explaining the differences between the main buzzwords in the banking service industry.
- Open banking is the standard for sharing consumers’ financial information safely, electronically, and under the conditions that are determined by those customers. It implies stringent requirements for structuring APIs, adding third-party providers (TPPs), and sharing data.
- Open API (Application Programming Interface) is a free-to-use set of protocols and codes that provides software engineers with programmatic access to a proprietary system. In fact, it is middleware that permits third parties to tap into customers’ banking data efficiently and boosts the development of new mobile banking services.
- Banking as a platform definition is as follows: it’s an approach where technology companies provide operating systems, development kit, middleware, applications, servers, storage, and other tools to financial service providers and banks. These platforms can also be utilized to deliver tailored services and products to customers.
- The meaning of “White label banking” is quite similar to that of “BaaS”, and they are often called synonyms. This practice enables new firms to render financial services and diversify their offerings by employing apps from a white label supplier, thus preventing legal, regulatory, and technical impediments.
- We’ve already spelled out the BaaS definition above and explained what is meant by “open banking” and “public API’’ in simple terms, and on first reading, they may sound similar since both grant access to the banking system software. However, the difference lies in the fact that open banking forces financial institutions to share customers’ financial data with third parties; meanwhile, BaaS software gives non-banking firms access to bank functionality and allows them to connect individuals outside of the bank’s actual footprint to banking facilities. Moreover, banking as a service is more flexible, and companies can choose a way to share information, whereas with open banking, you’re provided with the sharing rules that should be strictly followed.
As you can see, despite their formal resemblance, banking as a service and banking as a platform imply a different type of cooperation between parties. Meanwhile, all these concepts have the common goal of facilitating collaboration between banks and third-party providers, encouraging the development of new services, and taking customer experience to the next level.
How Does Open Banking as a Service Work?
- The BaaS as a Service process is fairly straightforward, and it starts with a financial service provider or fintech firm paying an installment to gain admittance to the banking platform as a service.
- The bank opens up its API to the third party, and so gives access to the systems, functionality, and information needed to build a digital bank or tender white-label online banking software as well as services.
- Consequently, incumbent institutions with obsolete systems can not only thrive on open banking solutions software and lead the evolution of digital banking but also unleash new revenue sources as they introduce their own open-source BaaS platforms.
In essence, there are two principal monetization strategies for banking as a service APIs that involve either withdrawing a monthly commission for access to the BaaS software or charging only when a particular service is utilized.
The BaaS Market Size And the Most Prominent Banking-as-a-Service Examples
In 2018, the size of the digital banking platform market was estimated at over $3 billion globally, and it is projected to exceed $8 billion by 2027. The two driving forces that contribute to such growth are the ever-increasing customer expectations and the fundamental digital transformation of the entire sector.
Consequently, all these factors push banks to not only share information or open services but also to make a banking software ecosystem of their own, namely BaaS.
At the time of this writing, the most popular banking-as-a-service companies that are purely focused on providing BaaS services are:
- SolarisBank markets itself as a “tech company with a banking license,” and in 2018, the company received over $56 million in Series B funding from Visa, BBVA, Lakestar, and SBI Group. Holding a German banking license, this Berlin-based firm empowers its clients to render compliant and digitized white-labeled banking services to their end-users. This BaaS provider collaborates with about 60 companies globally, including Smava, Trade Republic, Al Baraka Bank, Tomorrow, and others.
- ClearBank is a UK-based BaaS provider founded by Nick Ogden (WorldPay) and focused on “powering banking innovation.” The firm doesn’t work with clients but provides fintechs and FCA-regulated companies with an opportunity to develop their own services and products. Its offerings include safe access to key banking apps, payment systems, and schemes to guarantee a better end-user experience and financial inclusion. Among the ClearBank clients, you can see Tide, OakNorth, Nationwide, and Dozens company.
- Bankable is a London-based company that calls itself a “global architect of innovative payment solutions.” Its banking as a service (BaaS) platform covers digital banking services, online wallets, payment card programs, and a virtual ledger manager. The firm helps partners satisfy the regulatory and technological requirements since its core banking-as-a-service platform is PCI-DSS certified and allocated in Tier-4 data centers to guarantee exceptional security. The list of clients contains Spendesk, Royale Oceanic, and Moneyou, but soon it is expected to grow since, in 2019, Bankable declared its partnership with Visa.
These are just a few of the banking-as-a-service examples that are purely focused on BaaS.
However, there are also companies that, except for BaaS services, also maintain B2C operations.
Pi1 by Project Imagine is a powerful platform that runs one of the most popular UK-based fintech startups, namely the Dozens app. It comes with all the necessary financial solutions and progressive analytics software to help fintechs and banks build future banking services in three months. This BaaS cloud-based solution makes it possible for partners to utilize machine learning and KYC users in 90 seconds or see an end-to-end customer journey with all the milestones.
In late 2018, Starling Bank tapped into the BaaS and PaaS (Payments-as-a-Service) niches to assist fintechs and retailers with building and scaling their unique financial products, avoiding time-consuming development and complicated legal arrangements. Some of its clients include Ditto, Raisin UK, Xero, Telleroo, UK Department for Work and Pension, and others.
Green Dot fell into the ranks of BaaS providers at the beginning of 2019 and noted a six-percent increase in operating earnings compared to Q1 2018. It offers an exhaustive infrastructure for running payments and banking programs at scale. The firm collaborates with Uber, Stash, TurboTax (Intuit), and others.
Fidor Bank is a Munich-based digital-only bank that offers fully-ready white label banking apps covering compliance, risk management, technology, customer service, and bank licensing across Europe. Its operating system, fidorOS, allows the launch of a bank in just a few months while still ensuring a superior user experience. The company works with Van Lanschot, O2 Telefonica Deutschland, ADIB, and more.
The Introduction of PI1 Platform And the Role of DashDevs
Dozens, a London fintech disruptor, is one of many projects that the Dashdevs team is working on, but it’s worth noting that it is one of the most ambitious and pervasive projects. At that time, the Dozens (Project Imagine) team was turned down by nearly 99 percent of software development companies since they were far apart on the timeline.
Building marketable solutions for three different platforms in nine months was perceived as insanity, and that’s where the Dashdevs team didn’t go back on its words. The product has already been named among the top banking application and has been highly recommended by customers.
One year after the initial release of the Dozens app, we’ve shaken up the banking-as-a-service UK market with the launch of Pi1—a robust BaaS platform that currently runs Dozens and empowers banks and fintech startups to create their own financial solutions. The DashDevs team has been fully responsible for the banking application development.
By opting for Pi1, companies can significantly shorten time-to-market and reduce the resources required to modernize their systems or build new ones from scratch, all while focusing on what matters most—value for customers and capital raising. Unlike some other solutions in the banking-as-a-service sector, the Pi1 platform not only covers the functional part of fintech app development but the marketing side as well. It comes with a cutting-edge analytics system that allows firms to monitor the entire customer journey, from the ad and onboarding to the actual use, and make improvements only where they are needed, enhancing the user experience.
Traditional Banking VS Modern Banking: Industry Outlook And Expectations
A number of regions, including but not limited to Europe, the United States, Australia & New Zealand, and Asia, have already started implementing changes to comply with open banking requirements. Such a shift symbolizes that the financial services field is making its way to an age where shared infrastructure and data will become the new normal.
Banks used to be a one-stop shop for their consumers, offering a wide range of services and trying to foster their loyalty. Individuals also preferred to stick with one particular bank since managing multiple accounts and dealing with several providers was time-consuming and overly complicated.
However, the increase in banking software providers allows companies to create their own custom set of financial solutions from different providers, smoothly plugging into the regulated bank infrastructure. This is another way the traditional banking business model is being transformed to bring tangible benefits to customers.
If you want to know how Dashdevs can help you to build a banking software, please contact us, and we’ll get back to you shortly.