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Revolutionizing Banking: Banking as a Service

Banking today is a world apart from how it used to be for our parents. They had to visit the bank for small things like updating a passbook, but now, you can apply for a loan with just a few taps on your phone. Times have really changed!

The Current Landscape of Banking

According to a recent survey by the People Research on India's Consumer Economy (PRICE) think tank, India's banking landscape has undergone a significant transformation. Remarkably, banking access now extends to 99% of households, paralleling the rapid increase in mobile phone ownership, which also surged by nearly 40 percentage points from 2011 to 2021.

Progress Over the Years

  • Cost Reduction: E-banking has reduced costs for banks while expanding their user base, resulting in increased revenue through various channels
  • Error Reduction: Digitization has decreased human errors and allowed access to data for analysis at any time
  • Central Bank Oversight: The Central Bank has monitored these developments, with commercial banks adopting technology through mechanisms like MICR and Electronic Funds Transfer
  • Electronic Fund Transfers: Customers can transfer money between accounts without visiting a bank branch, simplifying transactions
  • ATM Convenience: ATM channels allow transactions across the country without visiting a branch

Present Scenario

  • Digital Transaction Support: The Indian government is increasingly backing digital transactions
  • UPI and BHIM: Government-launched UPI and BHIM are making digital payments more popular and innovative, reducing the need to enter bank details for every transaction
  • Cash-Free Economy: As we move toward a cashless economy, we're seeing more ATMs, and electronic payment systems like NEFT, ECS, RTGS, mobile banking, debit cards, and credit cards are now common in every Indian bank

The banking industry witnessed a pivotal shift starting in 2013 when Paytm, initially focused on mobile recharges, expanded its services to include mobile payments and digital wallets. This move marked the early stages of what would become a thriving fintech ecosystem in India, representing one of the first instances of a fintech company offering Banking as a Service.

What Is Banking as a Service?

Banking as a Service (BaaS) is a business model that allows non-banking companies to offer financial services to their customers by leveraging the infrastructure and capabilities of traditional banks or licensed financial institutions.

Timeline of BaaS Emergence in India

According to a study by the Stellar Market Research, India Banking-as-a-Service (BaaS) Market size was valued at US$ 8.74 Billion in 2020 and the total India Banking-as-a-Service (BaaS) revenue is expected to grow at 13.2% through 2021 to 2027, reaching nearly US$ 20.82 Billion.

Benefits of BaaS in India

Users’ Perspective

  • Convenience: BaaS offers users easy access to a wide range of financial services on smartphones and computers
  • Digital Payments: BaaS has driven the adoption of digital payments through UPI and digital wallets, reducing reliance on cash
  • Financial Inclusion: Users in underserved areas gain access to banking services, digital accounts, and government subsidies
  • Personalization: BaaS enables personalized financial products tailored to user preferences

Rural Perspective

  • Banking Access: Rural communities access basic banking services and digital payments, reducing the need for urban trips
  • Direct Benefits: BaaS facilitates direct subsidy transfers to rural bank accounts, reducing corruption
  • Entrepreneurship: Rural entrepreneurs access credit and financial services, fostering economic growth

Government Perspective

  • Financial Inclusion: BaaS supports the government's goal of including millions in formal financial services
  • Digital Governance: BaaS aids online transactions and e-governance, aligning with Digital India
  • Subsidy Efficiency: BaaS streamlines subsidy delivery by reducing intermediaries and leakages
  • Regulatory Oversight: The RBI ensures BaaS adheres to compliance and security standards

For Fintech Players

  • Access to Infrastructure: Fintechs access banking infrastructure without needing banking licenses
  • Partnerships: Collaborations with banks expand service offerings and customer reach
  • Product Diversification: Fintechs diversify offerings with new financial products, attracting customers
  • Customer Engagement: BaaS enables personalized services, enhancing customer engagement
  • Cross-Selling: Fintechs cross-sell banking services, increasing revenue per customer
  • Scalability: BaaS supports rapid expansion without extensive infrastructure costs
  • Data Monetization: Fintechs analyze banking data for insights and revenue opportunities
  • Cost Efficiency: Outsourcing banking functions reduces operational costs
  • Global Reach: BaaS facilitates global expansion, serving customers worldwide

How Does BaaS Work?

Non-banking companies and fintech players innovate by reimagining existing financial products, introducing smarter approaches, and selling these solutions. This process, known as "Unbundling and Rebundling" of banking functions, forms the core of BaaS.

Unbundling and Rebundling

You may feel that Open banking, platform banking, and Banking as a Service (BaaS) are more or less similar involving banks, APIs, and data sharing with non-bank entities. I may seem so from outside, but these are very different from each other.

BaaS vs. Open Banking vs. Platform Banking

Till now we have focused on BAAS, its benefits and how it changed the banking landscape of India. But nothing comes only with benefits. In the next section, let’s look at some of the greater challenger of BAAS

Challenges of BaaS

  • BaaS can be expensive due to provider fees and development costs
  • Protecting customer data is a critical concern
  • Navigating financial regulations is necessary for BaaS
  • Finding the right BaaS provider is essential
  • Multiple providers can offer similar services, potentially confusing customers

What Is in It for Fintech Players

BaaS opens up a world of opportunities for fintech companies to disrupt and reshape the financial services landscape, offering more choice and convenience to consumers and businesses alike. However, it's essential for fintech firms to carefully choose their BaaS partners, consider regulatory compliance, and address customer data security and privacy concerns to succeed in this dynamic space.

Here's what's in it for fintech in BaaS:

  • Service Fees: Fintech firms can charge service fees to their customers for the financial services they offer through BaaS partnerships. These fees can be transaction-based, subscription-based, or tiered based on the level of service provided
  • Rapid Market Entry: BaaS allows fintech startups to enter the market quickly without the lengthy and costly process of obtaining banking licenses. This accelerates their time-to-market for new products and services
  • Licensing and White Labeling: Fintech companies can license their technology and white-label their solutions to traditional banks and other financial institutions
  • Cross-Selling and Upselling: Fintech companies can cross-sell or upsell additional financial products and services to their customers
  • Data Monetization: Fintech firms can monetize customer data by offering insights, analytics, and market research services to businesses and financial institutions
  • Diversification of Services: Fintech companies can expand their product offerings by collaborating with various BaaS providers. This enables them to provide a broader range of financial services, from payments and lending to investment and insurance
  • Global Reach: BaaS partnerships can help fintech companies extend their reach beyond their home markets, tapping into a global customer base and expanding their international presence
  • Innovation Ecosystems: BaaS can foster innovation ecosystems where multiple fintech firms collaborate, share resources, and build upon each other's solutions, driving continuous innovation in the industry

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Revolutionizing Banking: Banking as a Service

Ankit Abhishek
,
Yatharth Chaudhary
,
  • January 23, 2024
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