Investment Banks and Underwriting
The primary function of investment banks is to help their clients raise equity capital. This is often done by initial public offerings. This is where investment banks provide their biggest service i.e., underwriting. Most people have a basic understanding of underwriting. They know that when an investment bank underwrites a share issue, they guarantee to […]
Valuing Preference Shares Using Dividend Discount Model
The dividend discount model is also used to measure the value of preference equity in addition to forecasting the value of ordinary equity. There are certain assumptions and clarifications that need to be made regarding the use of dividend discount model for valuing preference equity. The purpose of this article is to provide this information […]
The Components of an Investment Bank
As mentioned earlier, investment banks have been in operation for several years now. This is the reason why, for many years, they have been involved with almost any deal which includes large sums of money. The operations of investment banks have become very diverse over the years. This is the reason that investment banks are […]
Gender Gap in Pension Systems
The gender gap in pension systems around the world is a very real and pressing issue. Numerous studies have been conducted on this matter and almost all of them have concluded that the gender gap is a systematic problem that needs to be addressed by pension funds as well as by pension fund regulators across […]
Calculating Free Cash Flow to Firm: Method #1 (Contd): Treatment of Fixed Capital Expenditure
In the previous article we learned that free cash flow to the firm is closely related to the concept of cash flow from operations. The major difference was in the way free cash flow to the firm (FCFF) treats long term capital expenditures versus how they get treated in the regular cash flow statement. The […]
Technological innovations are having a huge impact on the commercial banking industry. Many parts of the commercial banking business are being completely transformed. For instance, earlier commercial banks used to own the entire banking value chain. However, of late, this has changed. Commercial banks now coordinate with a wide variety of financial and non-financial entities in order to provide banking services to their customers. The introduction of the open banking information technology architecture has played an important part in this process.
In this article, we will see how commercial banks have adopted a new model wherein they provide banking as a service to their corporate customers.
Banking as a service can be best understood with the help of an example. Let us imagine an online retailer like Amazon. Now, Amazon wants to provide certain cashback or discounts to their loyal customers. They also want their customers to be able to borrow money to complete their purchases. Ideally, Amazon would like to enable borrowing using a single click. This would help them to increase their sales.
In such cases, Amazon can deploy banking as a service model. They can launch their own credit card which provides certain customized features which help customers shop on their website. Since Amazon does not have a banking license, it cannot actually provide banking services. Hence, the system is devised in such a way that at the front end, Amazon would be providing credit cards whereas, at the back end, Amazon’s system will connect to the bank’s system using APIs.
Hence, in simple words, banking as a service allows a modular structure to be implemented in the banking value chain. This means that the front-end service can be provided by some other entity whereas, at the same time, back-end services can be integrated with a bank. This approach allows the creation of many new products, channels, partnerships, and opportunities that did not exist earlier.
Banking as a service is a technological system which works allows banks to work in close coordination with other banks, non-banking financial entities, or any other commercial entities.
In order to enable banking as a service, the first step is to ensure that the bank opens up its system and allows the other entity to communicate with these systems using APIs. Entities like Amazon can then use their systems to build innovative financial products which can then be offered to their end consumer. It is common for banks to charge a fee to enable the development of such APIs.
Once, the financial product has been developed, the commercial banks then allow the other entity to communicate with their systems at any given point in time. Hence, the banking system virtually becomes an extension of the commercial entity’s own system. However, each time, the bank’s system is used a fee has to be paid to the bank.
The end result is that banks are able to monetize their banking license as well as the robust back-end systems that they have in place.
The banking as a service system has created a new banking value chain wherein the roles provided by banks have changed. Earlier, commercial banks would work on all the roles in the value chain. However, now their action is restricted to certain parts of the value chain. The details of these roles have been mentioned below:
The bottom line is that banking as a service has now become a marketplace reality. Different entities now specialize in providing different services across the banking value chain. Commercial banks will have to strategize to inculcate this new reality into their operational strategy. Failure to do so will lead to the commercial bank being left behind in the new paradigm.
Your email address will not be published. Required fields are marked *
