As the new API economy flourishes, it’s a good time to look at the benefits and differences between two business models in the open data landscape.
It’s well known that the disruptive effect of digital technology is changing the way consumers access financial services and challenging the traditional industry model.
To capitalize on this transformation, banks need to embrace new business and distribution models for their products, including platform banking and banking-as-a-service (BaaS).
The first, platform banking, allows the entity to use the products or services of other companies through application programming interfaces (APIs), to solve the challenges and needs of their customers.
The benefit of this structure is that banks can streamline their processes and the end users’ experience by collaborating or partnering with a third party. By doing so, the so-called 'banking platform' becomes a gateway that solves a particular problem for a particular user, thanks to the integration of financial services.
On the other hand, in Banking as a Service (BaaS), financial institutions provide information and products through APIs so that other non-banking companies can offer services such as payments, credit or debit cards, and loans - among others – to their own users.
In this case, a third party can access financial products and services, without the need to develop them. The third-party consumer of data through APIs has the power to create their own banking products, by adapting to the regulated infrastructure of the financial institution that’s operating on a BaaS model.
To dive deeper on these definitions, an important difference between the two models lies in what the customer sees. In a banking platform model, it is the bank that owns the service. In banking as a service, the user experience is owned by a third party and managed in their own interface.
Here’s an example of banking as a platform: suppose a bank does not have the infrastructure to provide instant credit at the point of sale (better known as buy now, pay later). It may partner with a fintech company that has the analytics capability to do so. That company may consider variables beyond a traditional credit history or could simply generate a loan approval on the spot. In this model, the financial institution can open its product range by providing a third-party service.
In the case of BaaS, a non-financial entity - for example, a phone or transportation company - could partner with a bank to offer loans to their customers. The bank would take care of the credit risk and would benefit from the third party's leads and the non-financial entity would enable new functionalities for its customers.
Now that we have a better understanding of each business model, the question is: which model would best suit your bank?
Both banking as a platform and banking as a service offer benefits.
In the case of platform banking, as the bank is a net consumer of third-party APIs, it can quickly add new products and services to its existing range. Having acquired this new ability, the bank will have greater possibilities to expand into new markets and population niches by partnering with other players in the industry or ecosystem.
Platform banking adapts well to established banks that manage a large customer base and a concrete digital action strategy. In addition, it is also a good option for institutions that want to scale quickly in the market.
The benefits of platformification for banks lie in the broader product portfolios, offering more tailored services for the new needs and demands of the users, at a cheaper development cost.
Banking as a service, on the other hand, represents an ideal strategy for those institutions whose operational capabilities are highly efficient; that is, whose processes and back-end capabilities are strong.
In this case, the main advantages are summarized in a fast expansion of the distribution channels, as well as a greater market reach and new customer acquisition, while reducing the operating costs involved in the commercialization of banking products and services such as payments, credits, and transactions, among others.
Regardless of the final choice, both business models generate revenue and positioning for banks, making them highly competitive in the ever-growing global data exchange landscape.
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