It might be tempting to think that the conventional world built on loyalty and lifetime customer value has been shattered. In its place is a patchwork of subscription-based ‘as a service’ models that allow us to pick and choose how we use software, consume entertainment, and now benefit from banking as a platform (BaaP) services. However, the core philosophy has hardly changed at all. End users just want speed and simplicity, whatever way they’re packaged, and will migrate to those services that provide these best.
Right now, Banking as a Platform is driving innovation in financial services, forcing traditional banks and credit unions to respond. Here’s how an initial revolution in banking is likely to inspire a long-term evolution in financial services, with the end user front and center.
How Banking as a Platform Took Center Stage
Digitization of banking has opened up a Pandora’s Box of challenges and opportunities for traditional banks and credit unions. They were able to build on our existing trust — 8 out of 10 customers trust their primary bank — with in-house digital banking solutions that appeared to chime with the times. However, whether these delivered true innovation is questionable. In most cases where traditional banks unveiled a mobile app or new platform, it was often little more than a reskinned feature that offered the same core banking functionality. Without the budget or resources to invest in big software development projects, banks and credit unions could offer little to get the end user excited.
That landscape was ripe for plundering, and disruptive fintechs and big tech seized the opportunity, building specific solutions for niche verticals. In Europe alone, there’s been a 72% rise in the use of fintech apps since the pandemic. With a much narrower scope to contend with, these disruptors could bring a new solution to market quicker and cheaper than the big banks, building APIs and banking as a platform services that took full advantage of open banking.
With the pick of software development resources and talent at their disposal, these disruptor innovators could unlock capabilities that banks may not offer, like AI, machine learning and predictive analytics. Apple, Google and other Big Tech players continue to invest in mobile banking and payment solutions. Meanwhile, digital-only banks like Revolut and Wise offer innovative currency transfer solutions and fee-free services.
The traditional banks could rely on the trust of their end users, but not their undying loyalty. According to research by EY, 38% of end users would change their financial services provider for a better digital service.
Inevitably, these two opposing forces — big banks on the one side and lean, agile Fintech on the other — have found a way to accommodate each other in a way that showcases the strengths of each. In partnership, banks and credit unions can fulfill a valuable role as full-spectrum digital concierge, providing the regulatory structure and core interface for transactions. The Fintech provider, on the other hand, takes care of the Banking as a Platform software, offering better functionality and a faster time to market.
The result? The bank or credit union stays competitive and can respond faster to end user demand, while expanding its range of services beyond the core, for example:
- Insurance bundles
- Financial advice and planning
- Quick loans with a shorter approval process
- Better customer service tools
How Are Banks and Credit Unions Adapting?
In an earlier blog, we explored how cost and inconvenience are the two key barriers to change. Currently, incumbent banks represent just under a third of the BaaP market, so we’re hardly witnessing a rush to innovate. Nevertheless, some of the bigger banks and credit unions have begun incorporating BaaP products into their core banking service. HSBC and JP Morgan have both launched blockchain platforms. Wells Fargo has partnered with Xero, and Chase with Intuit.
While Generation Z and Millennials, in particular, are likely to maintain a mobile portfolio of assorted banking apps from various providers, end users overall are looking for their incumbent to take the lead.
Research by Deloitte, for example, shows that 34% of US consumers are positive about using a platform service offered by their primary bank.
To meet this need, we can expect to see banks and credit unions partnering regularly with third-party BaaP providers, even if the service is branded as the incumbents. That partnership plays to each solution’s strengths. The core banking platform secures the data exchange and authentication while the add-on delivers the functionality and innovation. Looking forward, as banks and credit unions unlock the ability to extract more insight from transaction data within the regulatory framework, they will be able to offer more personalized, bespoke services to their end users based on behavior, financial maturity and preferences.
What Does Banking as a Platform Mean for Smaller Community Banks?
While the big nationwide and international institutions have the budget to partner with fintechs, the smaller ones often don’t. That means they have to spend wisely and invest in priority areas that will deliver results. To identify these, they must engage their end user base and dive deep into their needs. We know that end users crave ‘authentic, local and ethical’ experiences in their banking, and it’s the smaller community institutions who are best placed to provide them. First, however, they must expand and consolidate their relationships with their end users by matching the personalized client service neo-banking platforms can offer.
The future of banking is changing. That’s no longer a bold or controversial statement. But the arrival of one platform does not mean the demise of another. More likely is a scenario in which both incumbent banks and fintech grow together, leaning on each other’s key strengths. For the end user, that’s a welcome proposition indeed.
Reach out to see how Lumin Digital can help personalize a platform that keeps your bank competitive.