How “Banking as a Service” is shaping customer experiences in Financial Services

A guest article by Leonard Coen, Head of Sales and Project Management, Financial Institutions, at Wirecard.

With Uber, Alibaba, Tencent, Apple, Amazon and Google launching financial products, we have seen an increasing push from non-bank players moving into financial services, a market that has historically been reserved exclusively for banks. We at Wirecard envision a world where this opportunity should not only be available to big Tech companies with endless resources but also to companies of all sizes wishing to extend their offering through financial services embedded into their core product offering. “Banking as a Service” plays a key role in achieving this mission.

Why is there growing interest from businesses spanning all industries to supplement their offering with financial services?

Firstly, consumer expectations are rapidly evolving. Easy to use and fairly priced financial services via digital interfaces are becoming the new norm. Secondly, by adding financial services to their offering, businesses can create additional revenue streams, thereby accelerating the path to customer profitability. Thirdly, financial products are extremely sticky. If successful, they do not only bring in revenue but also increase retention and brand loyalty. Finally, financial products unlock a wealth of data about customer behaviors, which can be leveraged in many different ways. These are only some of the compelling reasons that explain the growing demand for adding financial services to a business’s core offering.

We believe that startups, SMEs and large companies of all kind should be able to launch financial products within months and at a reasonable cost without having to become a bank and building prohibitively expensive financial technology in-house. While fresh entrants to the market will be able to capture new revenue streams with the addition of financial services, consumers will also benefit from more choice, better products, and lower prices. Our mission at Wirecard is to enable any business to offer these financial services.

The key to this opportunity space is called “Banking-as-a-Service”, a trend enabled by a new breed of providers such as Wirecard, who enable businesses of all shapes and sizes to move into financial services in a fast and cost effective manner.

What does “as a Service” mean?

The “As a Service” trend is nothing new. It has been proliferating worldwide in recent years, sweeping across various industries and radically altering many of them by creating new opportunities and innovation.

The whole era of Digitalization would probably not have been possible without the emergence of “Software as a Service” for instance. In days gone by, launching a software company was prohibitively difficult: entrepreneurs had to buy physical servers, source expensive software licenses and then code databases before being in a position to build a new product.

Today, a single developer can go from initial idea to deployment in days, thanks to providers such as Amazon Web Services or Google Cloud, who offer the above mentioned infrastructure “as a service”, thereby tearing down some key entry barriers.

And what about “Banking as a Service”?

More recently, the above paradigm shift has entered the Financial Services Industry with similar disruptive force. Traditionally, the pace of innovation in the financial services space was quite slow. While large banks and financial institutions are fighting against legacy IT systems, costly brick and mortar footprints and a strong culture of risk aversion, startups are constrained by the huge upfront costs and regulation linked to the launch of a financial product.

To exemplify how challenging it is for non-bank players to offer banking services, it is helpful to look at a few things a business would need before being in a position to bring a financial product to market (see graph 1 below for an overview of the different building blocks required to launch a financial service).

Firstly, it would need a banking or similar financial license. Obtaining such a license imposes not only significant capital requirements, but more importantly requires compliance with strict regulation with regard to money laundering, banking secrecy, deposit protection as well as IT security, to name only a few. Due to the systemic relevance of financial institutions in the economy, these licenses are very difficult and time-consuming to obtain.

Click to expand: Building blocks to launch a financial product

In addition, a technology core i.e. a core banking system would be required. This software is responsible for opening and maintaining user accounts, logging where the customers’ money is and how it is moving around. Also, it would be required to integrate with a series of payment systems so customers can send and receive money into and out of their accounts using SEPA or SWIFT rails. To issue payment cards, it would be necessary to become a principal member of either the Visa or Mastercard networks. To issue loans, it would be required to build up intelligence about the credit history of the target group via credit scoring agencies or alternative means. For AML and KYC, additional expertise coming yet again from a plethora of specialized vendors, would be required to comply with all relevant local regulation. Last but not least, the company wishing to build a financial product would need to implement fraud prevention systems, which requires yet again more software and systems. This simplified overview demonstrates how challenging it is to build a financial product as a non-bank player.

What if we brought the entire stack described above to the financial services industry “as a Service”? Similarly to the change that cloud providers brought to the computing and storage space, the entry barriers would be dramatically reduced and various players could offer financial services, thereby driving innovation and a better customer experience. That is exactly what Banking-as-a-Service providers such as Wirecard are doing.

Banking as a Service (or “BaaS”) offers a model in which licensed financial institutions, with a strong tech DNA, enable other companies to launch financial products by giving them access to proprietary financial infrastructure as a service. The non-bank player integrates the BaaS providers’ financial product directly into their core offering via APIs and distributes the combined offering in their own name, look and feel. The BaaS provider stays mostly invisible to the end customer and serves as an infrastructure supplier. Any business can now embed financial services into their product offering, such as mobile bank accounts, debit or credit cards, loans and payment services, without obtaining their own banking license and banking technology (see graph 2 below for an overview of Wirecard’s BaaS offering). Consequently, BaaS democratizes financial services and facilitates these to nearly any business.

Click to expand: An overview of Wirecard’s BaaS offering

For more info, please visit us here https://www.wirecard.com/financial-services

Let’s take a look at two concrete examples of BaaS embedded into non-bank product offerings:

Case study #1 – Xolo

Xolo is an online platform for launching and running micro-businesses anywhere in the world. Xolo offers users a holistic business platform that provides incorporation, taxation and accounting services, enabling entrepreneurs to set up and operate a hassle-free virtual business from anywhere in the world. In 2020, Xolo decided to launch a digital banking offering for micro-businesses to complement their service portfolio. Instead of applying for their own banking license and building costly financial technology in-house, Xolo decided to leverage Wirecard’s one-stop shop BaaS offering. Xolo users can now virtually open a business bank account within 48 hours, receive a corporate debit card, and be able to effectively manage their banking, tax and compliance activity via a unified Xolo dashboard.

Case study #2 – Payhawk

Payhawk is a startup with the mission to fully automate and simplify corporate expenses. It offers an all-in-one corporate expense and spend management service for small and medium sized companies. Payments, invoices, expenses and card spending are automated and digitized.

With the support of Wirecard, Payhawk decided to launch a corporate expense card for Payhawk’s corporate clients, who will in turn provide it to their employees to use for business expenses.

Payhawk have integrated the corporate card into their mobile App and web interface to give their corporate clients a comprehensive dashboard for complete control and transparency over employees' spending, travel expenses and other payments using the card.

Conclusion

The above examples demonstrate how BaaS facilitates the embedding of financial services such as bank accounts, payment cards, loans or investment products into the product offerings of non-bank players. It does so without requiring them to build up banking and banking technology expertise in-house. BaaS will further accelerate the trend of businesses all over the world moving into financial services thanks to substantially reduced entry barriers. The surge of new entrants with creative ideas and big ambitions will lead to a tremendous amount of innovation and enhanced customer experience. At Wirecard, we shape and drive this change, enabling businesses globally to offer financial services seamlessly.

This article originally appeared on FinanceDerivative on May 13, 2020.