The financial services ecosystem is currently experiencing a series of disruptions brought about by new era fintech players. Banks in India have opened up their application programming interfaces (APIs), allowing third parties to build on them, innovate and offer new products and services. This evolution has led to a transformation in the way financial products and services are created, distributed and accessed. Fintech players have seized this opportunity to constantly introduce automation to deliver a seamless customer experience. It also allows them to perform banking functions and access banking data for new innovative financial services. They can help customers make transactions, check account information or their balance, apply for loans, obtain payment instruments like cards, etc.

Let’s take an example here.

  • ABC Bank opens its core banking system to a third-party fintech player called PayTransfer
  • PayTransfer integrates with ABC Bank API. This allows them to connect to the central banking system of the bank.
  • PayTransfer makes API calls (essentially a request) to the ABC Bank server to perform financial functions or retrieve information.
  • Businesses use the single PayTransfer API to access multiple banking APIs and provide banking services.

What are APIs?

APIs are basically a set of protocols which allow simple and secure data exchange between two applications. These act as a middle layer, enabling the transfer of data between the two applications and allowing both parties to easily leverage each other’s data. Through the use of APIs provided by banks, any third party like a technology company, fintech company or player can access a bank’s core banking system to perform banking functions.

API-driven banking has thus brought about a significant change in the way financial operations are conducted today, by enabling easy access to banking services, products and data. Basic banking services such as account opening, fund transfers, loans, card issuance, etc. may be unbundled in this way and made available via third parties.

For the banking industry, APIs help banks:

  • Meet the changing needs of existing customers and attract potential customers
  • Increase customer satisfaction with innovative BaaS products
  • Provide secure, agile and future-proof banking methods

Third-party innovators have more flexibility to:

  • Provide better banking features and simplified financial services
  • Inintroduce more innovative fintech products to the market
  • Gain a competitive advantage

From a customer’s POS, they can:

  • Bank from anywhere, not just their bank/banking app
  • Get personalized financial service offers when they need it, for example: credit offers at checkout or wallet services to receive payments (gig workers)
  • Access financial information from anywhere, for example: see a consolidated view of their finances from a single dashboard and control, track and analyze financial movements

BaaS Platforms: Fostering an Era of Collaboration

By integrating with APIs provided by banks, non-banks are innovating and offering many basic financial services to customers. Banking-as-a-service (“BaaS”) platforms arrive here and act as “middleware” or an API-based BaaS layer. This middle layer integrates with banks and other regulated players on the back-end, and hosts various fintech startups and non-banking businesses on the front-end. These can be thought of as lego baseplates into which these entities can “plug and play”. Banking and other underlying partners provide the regulatory foundation, API platforms act as infrastructure providers, and fintech and other non-banking firms embed financial services into their non-financial products.

Fintechs and others are heavily using open banking API services (among other things) to:

  • Provide real-time account balances
  • Process supplier payments at high speed
  • Reduce administrative and other hurdles by offering credit, such as applying for a business loan, checking credit, etc.
  • Provide card, wallet and other issuance services
  • Increased visibility of cash position, cash flow, etc.

The end consumer comes out a big winner with innovative products and services at his disposal. They also enjoy a superior customer experience at competitive prices. Non-banks also benefit from the opportunity to realign their focus on core business propositions, driving innovation and accelerating time to market.

Distribution of financial services and future roadmap

The success of BaaS is highly dependent on the support of banking and other players who provide the essential underlying regulated layer. Crucial steps by banks, such as upgrading their existing technology stack, opening up their APIs, and supporting third-party integrations, will drive collaborative innovation here. Security is a key aspect here, requiring steps such as robust identity and access management and secure channels for exchanging data.

The future will see the roles of the various players in the BaaS ecosystem evolve, with banks increasingly outsourcing the distribution of their financial products and services through third-party fintechs and others. Innovating to create customer engagement and meet the demands of the new era through personalization and value-added services will be managed by third parties. These third parties will help banks grow their customer base and expand into previously underserved customer segments.

BaaS has opened up a treasure trove of opportunities for all stakeholders. Services such as accounts, card issuance, investment, loans, etc. accessible via these collaborative third parties – is the next big bet of fintech! This has certainly brought some interesting possibilities in the banking ecosystem. Going forward, we will see further advancements in the areas of open banking, integrated banking, co-lending, account aggregation, and API-based banking infrastructure.

It should be understood that for a diverse economy like India with varied financial needs, collaborative – as opposed to competitive – efforts are essential to meet its distinct needs. BaaS enables the same by creating a win-win situation for all participating/involved stakeholders – banks, non-banks and end customers. As banking APIs and APIs evolve, so does our financial services landscape.



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Disclaimer

The opinions expressed above are those of the author.



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