Banking as a Service is creating new opportunities for financial institutions to participate in the growth of digital banking without competing directly with every neobank or fintech entering the market. Smaller community banks in particular can provide the regulated banking infrastructure behind these digital offerings while using partnerships to expand their reach beyond traditional geographic boundaries.
The technology model supporting these relationships is also changing. Rather than building and maintaining every banking application internally, financial institutions can increasingly rely on hosted platforms and specialized technology providers. This approach can reduce the burden of legacy systems while giving banks greater flexibility to introduce new services and respond to changing customer expectations.
This is a well written article on how banks have transformed and the challenges associated with each of yesteryears technologies. Banks, especially small banks, are well positioned to grow in the BaaS space to not only become the charter behind neo banks and challenger banks, but to use them as a growth vehicle in an extremely competitive environment.
This is one of the ways smaller community banks will be able to survive against the large banks with large budgets.
In the digital age, parents are often taught by their children. While Baby Boomers are digital immigrants, Millennials/Gen Z/Gen Alpha are all digital natives. Each generation uses the same technology but their relationship with it differs markedly. Boomers grew up seeing technology; Millennials and forward grew up knowing technology. In a similar vein, can established banks learn anything from the digital upstarts? In this blog we consider the benefits of a hosted applications infrastructure.
Building a bank from scratch is never easy and there’s a great deal to consider. Getting the technology right is essential to support profitable growth, and to comply with a growing array of complex regulations. Yet there’s been a record rise in the number of start-ups. In fact, Bloomberg predicts that the global digital banking market will exceed USD $9 billion by 2027*. How is this possible?
Most of the recent start-ups are digital-only banks. On the face of it, they have some distinct advantages. Being unencumbered with costly branch networks, legacy technology stacks and outmoded thinking, digital-only banks offer a fresh approach to banking with a total focus on the customer experience. Just as importantly, they often benefit from superior operating efficiency and can compete with incumbents on price. Customers clearly value good digital service from their banks – in the UK, 23% of bank customers have already fully switched to a digital-only bank.**
Taking a closer look reveals that many digital banks are also doing things very differently. Often, they don’t run their own core technology, but rather rely on partners or third parties – sometimes even other banks. Ironically, this age of increased competition is also one of greater collaboration. How did this happen? A look backward gives us a better view of the future…
The boom in UK of digital only challenger banks not only had to do with new technology, but the fact that the UK has a few hundred banks, whereas the United States has thousands, meaning there was a pent up need for new services that the challenger bank filled.
Digital-only banks demonstrate how financial services can be delivered using technology models that emphasize partnerships, hosted applications, and specialized providers rather than entirely proprietary infrastructure. Established financial institutions can apply many of the same principles to modernize their own operations.
For community banks, this shift could be particularly significant. Smaller institutions typically cannot match the technology budgets of the largest banks, but they possess something many fintech companies need: regulated banking capabilities and established expertise in operating within the financial system. Partnerships can therefore create opportunities for banks to provide the underlying infrastructure supporting new digital financial services.
Banking as a Service can also transform competition into collaboration. Instead of viewing every neobank or challenger bank solely as a competitor, community banks can potentially serve as the charter, infrastructure provider, or banking partner behind those businesses. This model can provide new sources of revenue and allow institutions to reach customers they might never acquire through their traditional branch footprint.
The experience of digital banks also reinforces the importance of modern technology infrastructure. Hosted applications and third-party platforms can provide greater flexibility and operating efficiency while reducing some of the challenges associated with maintaining legacy systems.
As competition in financial services intensifies, Banking as a Service could provide community banks with another path to growth. Institutions that combine their regulatory and banking expertise with flexible technology and strategic partnerships may be better positioned to compete in an increasingly digital banking environment.
Overview by Sue Brown, Director, Prepaid Advisory service at Mercator Advisory Group
