Research Notes – Gold ETF
Till recently, banking solutions delivered as a service were primarily adopted by non-banking financial institutions that wanted to transition from a lending only model to a deposit-taking firm. It was also considered a good option for smaller banks that did not have the capability to master the complexity of integrating and managing multiple technologies and solutions. However, new banking formats that have been around for the past couple of years and increasing customer expectations and regulatory requirements have challenged banks to establish new capabilities quickly and offer new customer-focused products and services.
Banking-as-a-Service (BaaS) is an integrated set of technology capabilities that allows a bank to establish a complete and integrated banking applications technology base working with a BaaS service provider. It can be highly scalable and cost-effective, and i ncludes a host of capabilities covering Core Deposit and Lending systems, Direct and Assisted Digital channel capabilities, Compliance-related and Regulatory reporting capabilities, automation of Origination processes, capabilities to optimize customer services and sales, and a comprehensive span of payment solutions together with all external interfaces that are essential for a bank to function. The service can also be used by the Bank to further extend its capabilities via other owned technology assets that use these underlying services.
Typically, a hosted banking platform i s provided by an application service provider. This could be delivered as cloud-based hosting or hosting in a data-center with co-located infrastructure managed by the provider. In addition to the Applications themselves, the offering includes all elements of infrastructure maintenance and support needed for these applications covering compute, storage, networking and security components, with the assurance of policies and standards adhered to, delivered via dedicated or shared environments. The BaaS service provider also monitors the applications and technology infrastructure health, based on the bank’s service level requirements and takes preventive and corrective measures as required. Customer and internal user support capabilities that can be delivered for use by the banks include contact center capabilities, and end-user operational support help desks. The stack can also include technology capabilities to support further automation of customer-focused business, transaction and payment processes.
A pre-integrated set of solution components can reduce the total cost of implementation and ownership, providing cost benefits to clients, ultimately adding value back into the Bank’s businesses. This also provides a sound base to help expedite future implementation costs and timelines.
Institutions that can benefit from the BaaS model
Firstly, small finance banks have recently made foray into the Indian banking sector and more such SFBs are expected to be launched over the next few years. With substantially smaller technology investment capital, these institutions can greatly benefit from this model. Through the BaaS model, they can not only avoid high capex costs but also direct valuable capital towards the business, thus showing better IRR and better profitability.
Existing and new Non-Banking Financial Institutions (NBFCs) looking at venturing into new product areas can also benefit by adopting this model. It enables them to enter new segments and markets without large-scale incremental investments in technology, human resource, etc., and can use this as a way of expanding into new capabilities speedily.
Smaller urban cooperative banks and regional rural banks (RRBs) can leverage the BaaS solution providers’ expertise and scale to offer a mature solution stack that can enable them to focus on their business. Such platforms offer an easy model of scaling up as their business expands, and takes off the large load of managing technology, to allow them to focus on business growth with no restraints.
Organizations that have got the new paradigm right
Globally, across many mature markets such as the US, many financial and non-financial institutions such as cooperative banks and lending institutions have benefited from hosted and SaaS solutions. There are many examples of such service providers in these markets who service hundreds of institutions in such a model successfully while offering a stable, compliant, scalable and comprehensive set of banking technology capabilities to their customers.
Some of the other benefits they deliver include:
Increased speed to market for new products and offerings
Minimized up-front capital expenditure with variable pricing models
Enhanced cost synergies out of acquisitions providing cost/income improvements Reduced regulatory investment overheads Significant operational efficiencies through outsourced transaction processing
Lower costs in launch of segmented products Accelerating performance and compliance
Containing costs while accelerating product and service time-to-market
In summary, the BaaS model is an innovative, easy to adopt solution that enables financial institutions to avail of a comprehensive set of capabilities provided by the service provider. There is significant business value to be extracted through such offerings across:
Capital re-direction to business
Leveraging service provider’s economies of scale in relation to technology components and expertise
Enabling speedy expansion of product range and footprint
Allowing financial institutions to focus on a roadmap that is centered on business goals rather than applying mindshare to managing technology