Advantages of Banking as a Service

In the previous articles, we have already studied open banking as well as banking as a service. Many people tend to get confused between the two and think that both the terms refer to the same business model. However, this is not the case.

Open banking is more of a technical term that is used to denote the transfer of data between different banking and non-banking entities. Banking as a service is a business model which utilizes the core concepts of open banking. However, this business model leads to complete integration between the bank and the corporation providing the service.

Products and services are developed together by banks and other business entities and are also co-branded. Hence, it can be said that banking as a service is a broader term that encompasses the concept of open banking as well.

Since the banking as a service model has already started proliferating in the life of businesses as well as consumers, it is important that we are aware of the various pros and cons which are commonly associated with this business model.

In this article, we will have a closer look at some of the advantages which are associated with this business model in order to understand why its popularity has been increasing over the years.

Advantages of Banking as a Service

Banking as a service has been rising in popularity because there are several advantages associated with this model. These benefits accrue to all the parties which are associated with it. Some of the important points have been listed below:

  1. Focus On Core Competency: The banking as a service business model allows all the different parties involved in the value chain to focus on their core competencies. This is very helpful because, in the recent past, it has been observed that banks have started becoming more technology-oriented and technology companies have started focusing more on finance. Both these entities are struggling to provide world-class services to corporations and their end customers.

    Banking as a service business model where neither of these companies has to compete with one another. Banks can focus on transaction processing and meeting regulatory requirements whereas fintech companies can focus more on technological advancement. Instead of competing with each other, they can collaborate and ensure a mutually beneficial situation for themselves as well as for the end customers. This is the reason that traditional banks with lower budgets are keener on collaborating with fintech companies instead of competing with them.

  2. Reduced Expenses: Banking as a service provides banks as well as corporations with ready-to-use plug-in technological solutions which can be deployed easily. As a result, commercial banks do not have to spend millions of dollars trying to create technological infrastructure and also maintain the same. This reduced operational, as well as capital expenditure, provides commercial banks the option to lend out more money since fewer dollars are required to meet operational expenditure. As a result, commercial banks are able to enhance their interest-based income because of the usage of banking as a service.

  3. Higher Revenue for Corporations: Banking as a service enables financial and non-financial corporations to embed financial products in their own products and services. This creates the ability for corporations to increase their sales by providing finance at better terms to their end consumers. It is a known fact that the availability of easy finance is able to drive sales. As a result, corporations are very happy to tie up with commercial banks which enable them to provide banking as a service.

  4. Higher Revenue for Banks: Banking as a service allows banks to generate a new revenue stream using the communication infrastructure that they have on hand. Each time, another entity connects to the bank’s communication system, they have to pay a fee to the bank. Since this fee is not related to lending, it adds to the non-interest-based income at commercial banks and helps to diversify the overall banking portfolio. Commercial banks which are more technologically advanced are able to augment their incomes more quickly.

  5. Improved Customer Experience: Last but not the least, banking as a service is able to provide an enhanced experience to the end customer. This is because of the fact that earlier applying for any kind of finance or obtaining any kind of loan used to be a paperwork-intensive and cumbersome process.

    However, with the advent of banking as a service, customers are able to obtain these services at the mere click of a button. Also, since artificial intelligence and data mining techniques are being deployed, many times, the customer does not even have to apply.

    The system itself prompts the customer and guides them towards the best possible experience. It is, therefore, no surprise that commercial banks which extensively use banking as a service have seen their business increase through the years.

The fact of the matter is that banking as a service has several advantages. The modular structure followed by this business model has the potential to revolutionize the commercial banking business. However, since banking as a service represents a paradigm shift in the way commercial banks operate, they need to be careful about adapting their business models too soon.


❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Commercial Banking