Aşağıda yayınladığımız yazılar, Özyeğin Üniversitesi, Financial Engineering and Risk Management (FERM) Yüksek Lisans Programında vermiş olduğum Financial Technologies dersinde öğrencilerimin bitirme ödevi olarak hazırladıkları çalışmalardan oluşmaktadır. Yazılar kendilerinden izin alınarak yayınlanmaktadır.
The Brave New Banking World: Banking-as-a-Platform (BaaP)
Hazırlayan: Ece Gören
Today, rapid developments in technology affect all sectors radically. With these developments, business models and structures in all sectors have started to change. Banks, which have been working with the same business model for a long time, are one of the most affected institutions by this rapid development in technology.
Banking-as-a-Platform (BaaP) approach is the alternative new business model that emerged for these changes and current needs on the banking system.
So, what is Banking-as-a-Platform (BaaP)?
The current banking system is a system where all control is in the hands of banks. All services are provided by the banks. Banks are designing a new product, producing this product and selling it to the customer.
After 2014, the world started to hear FinTech companies much more. They started to become a rival to the banks at financial services.
FinTech companies have been more customer-oriented than banks. Instead of trying to provide all financial services, such as banks, they can specialize in a single field, So, they can understand the needs of the customer better and reach the solution faster.
Banking-as-a-Platform approach is intended for startups integrated with banks to design, develop and deliver products on behalf of the bank. Product quality, cost and customer satisfaction will increase due to the fact that FinTech companies specialize in a single field, understand the needs of the customer better and reach the solution faster. Banks will contribute to the platform with their experience in compliance, authority, and security and will gather FinTech companies under one roof.
The main purpose of BaaP is to provide low-cost banking services to the companies providing financial services, such as banks, and to offer special opportunities to customers.
Is this a threat?
Until FinTech companies, banks were the only organizations that performed banking services. All decisions were made and managed by a single organization within certain regulations.
With the FinTech companies, it was understood that the same services could be made more customer-oriented, faster and less costly. Banks perceived FinTech companies as threats because of the fear of losing their dominance and losing the corporate identity that determines the market. They didn’t want to cooperate with these companies because it meant to go out of their familiar business model. Therefore, they did turn against the Banking-as-a-Platform approach.
Nowadays, banks have started to work with FinTech companies in order to not lose their power at the market.
Traditional Banks & FinTech Companies
Many banks, even they have the same technology as FinTech startups have, do not use technology efficiently. FinTech companies can make better use of technology with more flexibility, so they can produce faster solutions.
The table below shows comparison between traditional banks and FinTech companies.
In this table, differences in business models of banks and FinTech companies are clearly visible. FinTech companies can increase the quality of service by working at the areas where banks are fall behind.
Banks have to change for keeping up with the current order and to meet the needs of the customers. This change can be achieved by creating a business model with FinTech companies.
What are the challenges?
Transformation for the traditional banks which are operating for a long time can be challenging. But this transformation is essential for banks to continue their lives.
One of the most difficult issues for traditional banks is the IT structure. It is a costly and long process to catch up with fast developing technology, integrate this technology into the bank and train staff to use this technology. In order to make a difference in today’s market conditions, it is necessary to adapt quickly to the developments.
The solution for traditional banks to shorten this process is Banking-as-a-Platform approach. Purchase and develop technology, train staff who can use this technology is much more costly over then working with FinTech companies and using technology through them.
A BaaP architecture is based on the following components :
· Scalable open API platform,
· Robust Business Process,
· Easy-to-integrate front ends and ‘plug and play’ connections,
· FinTech integration,
· Third party communication,
· Data flow synchronisation at differing traffic speeds,
· Symmetry of information,
· New Smart Transaction Management (STM) and Personal Financial Management (PFM) tools,
The Platform Banking Model
The platform banking model is based on the collaboration of banks and FinTech companies. The application programming interface (API) is the tool that will provide communication between them.
Traditional banks use APIs to intermediate between their core banking platform and their core banking app, creating a direct channel to customers under their control . Open APIs will enable banks to share information with FinTech companies. With this way, the ecosystem will work effectively. Open APIs will provide a more flexible working environment for FinTech companies.
Also, the platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create, and exchange value . This is provided by APIs.
Smartphone use is very common nowadays. It is possible to see the smartphone in the hands of many people from young to old. Now people do most of their work with their phones. This situation provides the ground for platform-based structures in banking. Banking transactions can be done on the mobile phone, so why go to the bank? As a result of this question, the need for banks physically (branches and head office buildings) is decreasing. Banks and FinTech companies can work together to develop an online banking platform. In this way, customer satisfaction will increase and more customer acquisition can be achieved. However, due to the fact that all kinds of banking transactions will proceed online, there will not be any physical structure that customers can contact. For this reason, the security of the platform is very important to gain the trust of the customers and keep the customers’ data safe.
One of the biggest challenges facing FinTech startups is regulation. In order to do business, they must comply with the regulations of the country where they are located. Regulations can change over the country. It can be flexible or strict. However, it is difficult for FinTech startups operating in a very strict regulation environment. This can be a very costly situation. On a strict regulation, FinTech startups may not survive.
With BaaP, the regulation problem will be solved for many startups. The problem will be eliminated by working with banks which are compliance and regulated. This will cause FinTech companies to grow, scale to global and create more cooperation.
The proper functioning ecosystem will attract the attention of FinTech startups from other countries. Today, FinTech startups are not scaling at the global. Only, 25 FinTech-startups (in comparison with 50 FinTech-unicorns and 5000+ FinTech-startups) have successfully managed to expand globally . Appropriate regulations, market opportunity, a good working ecosystem and flexible business models in countries will start to attract FinTech startups. In this way, innovation and diversity will increase.
As I explained before, traditional banks are the only organizations that performed banking services in the market. Until FinTech companies come! If banks want to keep their strength in the market and even sustain their lives, they have to change. They need to do this fast. The banks that accept and adopt the change sooner, will step forward in others.
Banking-as-a-Platform approach will enable the customer to provide quick solutions and receive personal financial services. With the competition environment, there will be an increase in service quality and a decrease in costs. Thanks to this approach, banking services will be moved one step further. In the future, we will begin to hear the name of Banking-as-a Platform more.