The risks in BaaS models
As banks around the world embrace the banking-as-a-service platform, a global ratings firm sees some risks in the model.
S&P have already highlighted a number of risks in banks using cloud technology.
The global ratings firm believes that the trend toward outsourcing "as a service" combined with open banking and the use of application programming interface (API)-driven platforms, suggests that banking as a service (BaaS) may potentially evolve to become a new way for customers to do their banking.
“This would change the way in which customers interact with banks,” S&P credit analyst and the report’s author Miriam Fernandez said.
BaaS provides banking products and services (such as loans, payments, deposits, or accounts) as a service using
an existing licensed bank's regulated infrastructure with modern API-driven platforms as highlighted in the chart below.
“BaaS gives customers access to fast, interactive, and engaging banking experiences,” Fernandez said
“It also provides banks with new customers and some additional revenue streams, even if such revenues are so far less significant.”
S&P notes that such models are becoming a popular strategy for banks in countries like the US particularly for midsize and smaller banks.
Such banks believe the BaaS platforms give them both the scale and customer relevance.
For example, the report highlighted that in 2020, Google announced partnerships with several banks to launch Google Plex through its Google Pay application, a new digital checking and savings account offering smart payment options, rewards, and financial management services.
Under this model, Google will provide the front-end, intuitive user experience and financial insight, while relying on the banks' existing infrastructure and regulatory compliance.
Australian banks are also adopting such platforms, most notably Westpac under its partnership with Afterpay and SocietyOne.
Neobank Volt Bank has also re-emerged post COVID as a BaaS platform securing global bank Railsbank as a partner.
S&P highlighted some “business risks” in these platforms.
“In the short term, we believe big techs will focus on becoming key IT vendors providing vertical solutions to banks, rather than becoming full-fledged banks,” Fernandez said.
However, over time, Fernandez believes that these tech giants could use their power dictate terms and pricing, as Apple has done with its digital wallet service Apple Pay.
“In the longer run, BaaS could pose risks to banks' recognized brands and reputation, which could gradually be forgotten by customers as banks play a role in the back end, ultimately becoming invisible players.
“BaaS could also turn big techs into serious competitors to incumbent banks, as they would agglutinate banks' valuable customer data and could eventually use it to their advantage.”