A bank as a service can be an attractive approach to outsourcing critical operations and software to others that lack the means to do so.
In recent years, third-party providers have been hosting applications such as cloud computing and software, infrastructure and platforms as a service. The bank as a service is the next generation of innovative solutions where banks outsource critical operations and software components to other banks that do not have the desire or means to develop them in-house.
It is like being an IT outsourcing provider with banking capabilities. Products include core banking systems, as well as mobile banking applications, data, analytics, risk and compliance. The benefits are similar to those of other service platforms that have successfully launched models that can be accessed from any device with an internet connection and web browser.
However, there is a difference between developing a platform for the bank versus working with third parties where there are agreements that need to be respected. Instead of developing products for one company, five banks may be asking for different services – which may alter the platform that needs to be created.
Why this approach makes sense
As a full-scale service provider, a bank has a subscription-based licensing and service model. Ready-to-use banking components are available through application programing interfaces (APIs) that enable users to collaborate and share information. Applications are hosted in the cloud via a web browser, single app or an app purchased from an app store.
Banking software extends across a broad range of areas including know your customer, anti-money laundering, data management, reporting and compliance. High-value services can be added, adapted or integrated based on the customer’s needs. Third parties benefit from faster time-to-market and scalability.
Innovation comes at a price and developing and maintaining banking as a service can be costly. However, profitability can be reached through large-scale distribution. Usage, licensing, maintenance and integration fees will help recoup the costs.
Bank as a service provider
Some banks are finding this approach attractive and are developing their own platforms (partially or fully). However, the business case only becomes viable if the development costs are shared among different participating organizations. To succeed, banks need to ensure the best-in-class technological foundations and be market leading for their services.
Banks will have to learn to collaborate more efficiently with external vendors. It will be very different than working with internal teams that share the same values and culture within the same company. It’s important to recognize that these activities will require clear adjustments to the business model.
EY has identified five ways that banks can reshape their future: as an experience, marketplace, service provider, facilitator and producer. This article is part of a series that highlight the features and benefits of each. Under this new direction, none of the five ways are vertically integrated. Banks could adopt one approach or a combination that will help them truly differentiate their bank from others.