Embedded banking models and the rise of Service-as-a-Bank (SaaB)

For a while now, the financial industry has been experiencing increased collaboration and technological integration between innovative fintech companies and traditional financial service providers: embedded banking.

It’s high time that banks and credit unions stop seeing competition only as a threat

Banks partner with fintech companies and challenger banks in search of technology and new business opportunities – but if they’re not carefully considering which exact embedded banking model they need, they may end up having someone else’s name printed over theirs.

Let’s learn how three embedded banking models – Banking-as-a-Service (BaaS), Banking-as-a-Platform (BaaP), and Service-as-a-Bank (SaaB) – work and what advantages and risks exist for banks.

BaaS: lending vs. branding

The first embedded model, BaaS, refers to technology providers and non-banks that offer financial service products, such as electronic wallets, consumer loans, or payments. Due to regulation and a lack of financial capital, many fintech companies use banks’ financial products. Established banks hand over financial products often in the form of white-label or co-branded products.

However, increasing competition is also putting pressure on banks to adopt modern technologies and offer their services to a growing number of consumers. Worried about losing their customer relationships, banks don’t have much choice but to offer these new financial products as white-labelled BaaS solutions. This, in return, is stretching their marketing capacity (by adding additional layers such as B2B2C and B2B2B), dimming their brand image, and cutting into profits (for example, due to pay-for-use monetisation).

Amazon is one such business that has been working for years to expand Amazon Pay as a payment instrument. You can imagine how hard it is to keep up with the seamless shopping experience Amazon provides, being able to give discounts and cashback on customers’ purchases. Banks need to evaluate their digital transformation and service efforts so they don’t get left behind as tech companies like Amazon or Apple continue their rapid progress.

BaaP: caught between innovation and regulation

The counterpart to BaaS is BaaP. Facing customers that expect a seamless customer experience, more and more modern banks are gearing up to work with technology providers to ensure the best possible experience. The bank usually acquires services in a modular á la carte approach without losing its core customers.

In this embedded banking model, banks can focus on developing and delivering banking products and services, and fintechs can specialise in developing real-time payments, blockchain technology, or savings algorithms.

BaaP lowers development time and costs for technology and allows banks to introduce new services quickly to achieve higher customer satisfaction. However, there are some disadvantages. First, banks looking to provide the best customer experience will have to partner up with several different tech providers to get what they need, increasing integration costs and complexity.

Second, customers’ options are entirely limited to what their bank offers or can afford to integrate into its services. Smaller banks, particularly, might struggle with compliance such as the Payment Card Industry Data Security Standard (PCI DSS) – financial data security guidelines designed to safeguard credit and debit account data. Offering these or other products requires a costly and time-consuming process for banks.

SaaB: a full-service marketplace

So what’s the better deal, banks using fintech technology or fintechs using financial product offerings by banks? While there is no simple answer to that question, a third embedded banking model is available: SaaB.

Suppose a customer of Bank A is looking for a product such as a credit-builder loan. Bank A cannot offer this product because it has not yet received regulatory approval, but Bank B offers this product to its customers. With BaaS or BaaP, Bank A’s customers would have to leave the bank and go to Bank B to get the product they want – but with SaaB, this is no longer necessary. SaaB allows Bank A to use Bank B’s product through their platform and offer it directly to customers.

The technology allowing this type of collaborative banking is APIs. With open banking, banks and fintech companies can tailor their service offerings to each customer, save money on developing expensive technologies, and build a collaborative financial market.

The advantages for the bank are manifold. First, the business does not conceal its brand behind a fintech label. Second, it does not lose the customer to another neobank. And third, it can now diversify its catalog without investing significant resources and huge time to market.

SaaB is vital for emerging markets

SaaB has what it takes to drive banking in all markets, but especially in emerging markets. Companies and new banks struggle to develop their financial products in less developed economies, where technology and internet adoption rates are slower. In Africa, according to BNP Paribas, one-third of small businesses, including banks, are struggling to keep up with technological developments.

Further, compliance costs in these countries may also outweigh market opportunities. Banks need to conduct a thorough cost-opportunity analysis before investing in a new product or technology that could take forever to develop due to bureaucratic hurdles or legislation.

A collaborative banking model, where fintechs and banks can share their financial services and use their products as part of a white-label solution, will bear the most advantages for development, technological innovation, and progress.

It’s high time that banks and credit unions stop seeing competition only as a threat. In fact, by being smart about their moves, keeping an eye on the market, and collaborating via SaaB where necessary, they will avoid becoming invisible, and instead, stay right at the heart of the customer.