Pros and Cons of Banking as a Platform (BaaP)

In the previous article, we have already studied what Banking as a Platform (BaaP) is. We now know the way in which Banking as a Platform (BaaP) is using technology to revolutionize the commercial banking industry. We also know how Banking as a Platform (BaaP) is different from Banking as a Service (BaaS).

However, it is still important to understand the various pros and cons of Banking as a Platform (BaaP). Only after such pros and cons are known can a decision be made regarding whether this model should be adopted on a large scale in the commercial banking industry.

In this article, we will try to enumerate the various pros and cons of Banking as a Platform (BaaP). The details of the same have been mentioned below:

Pros of Banking as a Platform (BaaP)

1. New Revenue Stream: The fact of the matter is that fintech companies are here to stay. Hence, the commercial banking industry will have to find a way to collaborate with the fintech companies instead of competing with them.

   Banking as a Platform (BaaP) is a mechanism that allows commercial banks to gain the maximum leverage as commercial banks can generate the maximum amount of revenue by using this model.

2. More Innovation: Banking as a Platform (BaaP) is useful for the corporate customers of commercial banks as well. This is because of the fact that these customers do not have to rely on only the commercial bank to develop the latest applications. Instead, they can get services from a wide variety of technology service providers who are competing with each other to provide better apps. This increased competition between service providers leads to more innovation which in turn helps in creating a better product for the end consumer.

3. Better Data Security: In open banking as well as Banking as a Service (BaaS), the financial data of the customer has to flow through various platforms and applications. However, when it comes to Banking as a Platform (BaaP), the number of integration points is reduced.

   Most of the financial data related to corporate customers are processed within the bank’s platform. The end result is that the data is more secure and there is a lesser chance of a breach as compared to other models which have been built using the principles of open banking.

4. Lower Capital Spends: Building a platform that can be used to build commercial banking-related applications can be a very expensive proposition. If commercial banks do not allow fintech companies to use their platforms, they have to spend a lot of money in order to either build or rent such a platform. This extra money spent can be considered to be a waste since it is redundant and does not add any value to the end customer.

   The Banking as a Platform (BaaP) eliminates this redundancy as it eliminates the need for fintech companies to make large capital investments. Instead, these companies can use their funds to help develop better APIs and applications which provide more benefit to the end customers.

5. Clearly Defined Responsibilities: It is important to note that Banking as a Platform (BaaP) has clearly defined relationships. The commercial bank is responsible for data security and authentication whereas the fintech company is responsible for everything else. There is a huge benefit to having clearly demarcated responsibilities. Once the responsibilities are demarcated, there is no ambiguity which helps in improving data security since no party can pin the blame on the other.

6. Strengthened Brand Image: Last but not the least, most open banking-related models end in the brand image of the bank becoming weaker. For instance, in banking as a service, the bank becomes a white-label back-end service provider. However, this is not the case in Banking as a Platform (BaaP).

   Banking as a Platform (BaaP) enables banks to sustain their brand image and even improve it further. Under this model, customers choose a bank based on its reputation and brand image and then later access the ecosystem of applications that the bank provides. Hence, the reputation and goodwill of the banks are enhanced instead of being diminished.

Cons of Banking as a Platform (BaaP)

1. Higher Spends on Security: When commercial banks adopt the Banking as a Platform (BaaP) model, they open their platform to many different entities. Hence, the commercial bank faces several security risks even though the customer data is more secure. There are procedures that have already been developed to ensure data security. However, implementing those procedures means increased expenses for the commercial bank.

2. Technological Challenges: When commercial banks adopt the Banking as a Platform (BaaP) model, they cease to be purely financial entities. The commercial bank becomes a techno-financial entity for whom the technical aspect is almost as important as the financial aspect. The problem is that banks do not have the skillset or the core competence to deal with such complex technological changes. Hence, the commercial bank has to face a steep learning curve which can be quite challenging and could lead to financial losses if not monitored correctly.

3. Increased Complexity: Banking as a Platform (BaaP) ends in the creation of a very complex system. The commercial bank allows different entities to access their systems. As a result, the complexity of the system increases manifold. This increased complexity can become challenging in the event of a breakdown of the system.

4. Loss of Control: Banking as a Platform (BaaP) is a business model which requires a lot of collaboration between commercial banks and many other financial entities. As a result, commercial banks have to collaborate with various entities. The end result is a loss of control for the bank.

The fact of the matter is that Banking as a Platform (BaaP) is a promising new technology that is in its nascent stage. All the pros are related to tangible business benefits whereas most of the cons are related to technical or implementation-related issues which can be resolved. Hence, it can be said, with reasonable confidence, that Banking as a Platform (BaaP) has a bright future ahead.

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