Easy-to-use, personalised, and seamless — these are what consumers expect of services from any organisation today. For banks, delivering such services require more than just digitising their existing offerings. Instead, they will need to relook at their business models and embrace the concept of the invisible bank.
The invisible bank will be buried within a broader, more digital and connected way of life. This means extending a bank’s touchpoints to areas that intersect with consumers’ lifestyles to make banking services more accessible and ubiquitous.
For example, Singaporean consumers can pay for a McDonald’s delivery using the DBS PayLah! mobile wallet. They can also access DBS Bank’s online marketplaces to make travel bookings, purchase cars or find the property best suited to their needs.
BaaS vs BaaP
To make banking invisible, financial institutions will have to adopt new business models such as banking-as-a-service (BaaS) and banking-as-a-platform (BaaP).
BaaS, also known as embedded finance, is enabled by seamless integration of financial services into non-financial digital platforms like e-commerce platforms. “BaaS is about getting banking products distributed through non-financial organisations so that the latter can offer a complete set of services across their customers’ journeys,” says Anton Ruddenklau, partner and head of Financial Services of professional services firm KPMG in Singapore.
This is exemplified in the case of super app Grab. Besides providing lifestyle services in its app, Grab offers personal loans to existing and eligible Citi credit card customers in Singapore.
KPMG estimates that up to 100 large corporations globally are pursuing the embedded finance strategy, resulting in between 30 to 50 significant BaaS initiatives worldwide. Specific to Asia Pacific, nine banks have publicly announced their BaaS programmes so far.
BaaS appeals to banks as it provides incremental revenues and customers, without the risk and cost of distribution infrastructure.Anton Ruddenklau, partner and head of Financial Services, KPMG
BaaP or “platformication” also encourages banks to collaborate with others. However, the role of banks in BaaP is to build a digital ecosystem offering both financial and non-financial services to customers, like in the case of DBS’s marketplaces mentioned earlier.
To do so, banks offer a platform infrastructure that manages the secure exchange of data, oversees authentication and authorisation, and ensures compliance with relevant regulations. This provides plug-and-play standards, making it easier for third-party developers to build products for the banks’ customers.
According to the Economist Intelligence Unit report commissioned by Temenos, nearly half of the 300 bankers surveyed globally in February and March expect their business to embrace BaaP over the next two years.
With BaaP, banks can increase customer satisfaction and stickiness while saving money on development and support. The more services a customer subscribes to with a bank, the more likely they are to continue and deepen their relationship with the bank if the experience is positive.Chua Horng Shya, managing director, Oracle Singapore
However, KPMG’s Ruddenklau sees building ecosystems or marketplaces as a risky move for banks. “Initial forays into BaaP have shown them to be spectacularly unsuccessful in acquiring participants and building both the supply and demand side of these platforms,” he warns.
Determining the right business models
Instead of limiting themselves to one business model, banks should adopt business models best suited to their strategy and market position in different segments and geographies.
Kanika Hope, chief strategy officer of banking software provider Temenos, says: “In markets where they dominate, banks may choose BaaP to provide a full front-to-back service and aggregate third-party products to build their own digital ecosystems. [This allows them to] generate new revenue streams from selling third-party offerings to clients and from gaining new customers from the network effects.”
“But to enter new markets, banks may decide to [go with BaaS and] offer their services to third-party distributors or participate in an existing ecosystem... [as that will help them] acquire new customers cheaply and rapidly,” she adds.
Standard Chartered is one bank that has taken such an approach. It has launched digital banking platforms in Africa to cater to the unbanked population while offering BaaS in Indonesia to co-create solutions with e-commerce, social media and ride-hailing companies.
Paving the way to invisible banking
Enabling invisible banking calls for a detailed strategy and holistic transformation. Ruddenklau therefore advises banks to first take the following steps:
- Have a strong market vision for future pathways of their franchise
They can do so by taking an out- side-in view as to where they will add value in the various ecosystems such as health, e-commerce, and mobility.
- Determine what fields of play (or business models) the bank wants to choose from
These fields should have relevance to the existing bank franchise or be completely disruptive, positioning the bank as a challenger.
- Be clear on the product roadmap for the new platform
One way is to start from back to front, using the big idea from the vision and set of highly differentiated services. Determine what constitutes a network effect for the platform to create highly competitive barriers and work the strategy back from there.
- Develop a strategy on how to jump-start both transaction and customer flow onto the platform
This could be through partners, acquisition, migration of existing customers or by forming consortia.
Thereafter, banks will need to transform their IT infrastructure and systems to support the chosen new business models and enable invisible banking.
See also: SMBC ramps up digitalisation efforts with Covid-19 as catalyst
Guru Venkatachalam, vice president and chief technology officer for Asia Pacific and Japan at cloud computing and virtualisation technology company VMware, notes that many established banks are “running on legacy core banking systems, infrastructure and applications that have challenges around resiliency, availability, and scalability”. This prevents them from addressing changing market dynamics in an agile manner.
“Financial institutions now need a strong foundation to build, run and manage all of their apps across any cloud [to deliver digital services. They] must also balance digital-first experiences with risk to ensure customer data remains protected, maintain compliance and ensure resiliency as data breaches and ransomware attacks grow in tandem with customers’ demand for superior digital financial experiences and services,” he says.
Recognising this, Union Bank of the Philippines (UnionBank) has deployed VMware Cloud on AWS to modernise its IT infrastructure. The move will provide the flexibility and agility for exponential growth and enable faster time-to-market, empowering the bank to drive greater financial inclusion in the Philippines. UnionBank will be able to quickly launch new financial services and provide consumers and local businesses, including those in remote parts of the country, with access to tools to help better manage cash flow.
Modernising banking platforms and apps, notes Oracle’s Chua, will also help banks reduce the technology debt they have amassed over the years of investing in legacy infrastructure. "Currently, a large proportion of IT budgets in banks are spent on back-end operations, leaving not much for the introduction of new innovations. Cloud solutions today can help flip this ratio around so that banks can focus on innovation and derive the full benefits of BaaS and BaaP," she says.
India’s Shivalik Small Finance Bank, for instance, is using cloud solutions to reduce costs by optimising resources, enabling easy scaling and strengthening its cyber resilience. Consequently, the institution can better focus on its core business, introduce new products and services quickly to customers and enhance their overall banking experience.
The Indian bank is also leveraging Oracle Cloud Infrastructure and Oracle Application Programming Interface (API) Management to launch an API developer portal. The portal will facilitate a smooth integration journey for FinTech companies and neo-banks to co-create solutions for the underserved in India.
Additionally, banks should consider leveraging disruptive technologies like APIs, microservices, artificial intelligence, and blockchain to enhance their core banking platforms.
Disruptive technologies are seeing widespread adoption in the industry and are profoundly changing the way banking services are delivered and consumed. This accelerates the twin trends of digital and open banking, as well as drives increased agility, elasticity, resilience and connectedness.Kanika Hope, chief strategy officer, Temenos
She also shared that core banking platforms built on those disruptive technologies “can deliver complex functionality 20 times faster and are 10 times cheaper to run”, according to a primary research Temenos conducted last year with industry experts.
Invisible banking is a strategic imperative for banks
Given the rapid pace of change, internally developing and managing all their products, capabilities, and services is no longer an effective way for banks to compete. Moreover, consumers expect to be served with hyper-personalised experiences and context-specific products and services in line with their financial well-being and lifestyles.
Banks therefore need to move some of their services outside of the traditional banking channels and weave them into consumers’ daily activities. They can do so by embracing new business models that enable ecosystem play like BaaS and BaaP.
Collaborating with partners will enable them to leverage customer trust and bolster product and service offerings to improve customer experiences, deepen relationships and drive revenue growth.
Regardless of the new business model banks decide to employ, they will need to have a carefully planned strategy and the right technologies to support the model.
“Financial services firms should leverage tech investment to reduce and manage infrastructure complexity, drive automated processes, reduce overall operational costs, boost customer satisfaction and support innovation,” says VMware’s Venkatachalam.
Banks should also ensure their infrastructures and platforms are resilient.
As banking services are almost like utility services that are expected to be available on-demand in the BaaP and BaaS models, infrastructures and platforms that mitigate that availability risk are essential.Guru Venkatachalam, vice president and chief technology officer for Asia Pacific and Japan, VMware
Adopting new business models, especially BaaS and BaaP, will not be easy. But the move will enable invisible banking services, giving banks an opportunity to stay (or be more) relevant to customers and drive profitability. As such, banks should act with a sense of urgency now, like an attacker seeking growth instead of a defender hoping to hold onto a legacy position.