The advent of digitization has made our life much easier. We certainly no longer know how to live without technology. From e-commerce websites to online banking, digitization has brought the business to the fingertips of customers, leading to the introduction of application programming interfaces (APIs), where organizations outsource the development of their digital assets to a third party.
Banking is a sector that has grown considerably thanks to digitization, with several banks having opened up APIs, allowing third parties to innovate on existing services while offering new products and services.
APIs have ushered in the next phase of digitization after the first changes to internet banking, discussed Amit Goel, Country Manager and Vice President of Prove, and Reeju Datta, co-founder of Cashfree Payments at the launch of a white paper titled ‘Banking-as-a-service: the transformation potential of unbundled banking services‘at YourStory TechSparks 2021.
This ultimately led to a reimagining of financial products and services and a shift in the central role each actor played in the resulting ecosystem.
BaaS involves the extraction of a lot of complex data present in banks, such as governance, compliance, licensing and among others, Amit said. Noting that fintech and tech companies need everything in the form of an API, he said it’s important to extract all the complexity and make it available.
âI think there are a few things that we have seen in terms of innovation in this area – one is speed, the second is API reliability and third, the data you expect,â he said. -he declares. Amit added that many future innovations will depend on retaining the customers who have grown with the company.
Citing the example of DriveWealth LLC, Amit pointed out how they extracted the intricacies from the system, allowing anyone from anywhere in the world to invest in stocks. Citing another example, he said that the ability to choose insurance when purchasing certain products is also a classic example of this service.
While private and partner APIs have enabled banks to streamline and optimize internal processes, public APIs have enabled them to unlock the potential of their services and data, leading to unbundling of banking services. API-based banking services put the customer at the center of all decision-making, allowing transparent and direct access to one or more of these services from any customer touchpoint.
What makes BaaS promising?
A host of banking services, Reeju said, will be offered by a third-party app that consumers or businesses regularly use.
Citing the example of UPI and how it has been seamlessly integrated into third-party applications, he explained, âThe most critical thing is the actual creation of the account, access to the account statement and the account management. It means making payments, transacting as well as managing wealth, âsaid Reeju. He further stated that it was possible to opt for pure neobanks or opt for existing applications that provide neobank services.
He added that setting up and running bank accounts outside of a bank’s ecosystem is promising and not talked about as much as aggregation of accounts or open credit. âThis is something that we are working on with the platforms, on how to enable neobanking outside of banking,â he said.
Overcome the challenges
Business models and policies are the two potential obstacles to the growth of BaaS in India. Reeju believes that cooperation between fintech companies and banks has improved significantly over the past five years.
âAs we do more complex things, there are questions about how contracts are defined, how API access controls are defined, and service reliability,â he said. Adding that BaaS is used to help fintech companies scale faster, Reeju said the challenge is to try and allow other banking services to scale even faster.
Another challenge for growth would be to determine if non-fintech companies are capable of easily becoming fintech companies. âThis is BaaS’s promise to enable any business to become a FinTech company and grow its revenue. We have yet to see evidence of reasonable success in India, but there is a lot of promise on this front, âhe added.
Regarding policies, Reeju highlighted how European banks have clear and open banking guidelines. “It’s still early days, but we expect the RBI to have policies, licenses, or a well-defined set of dos and don’ts over the next five years, and that kind of pressure from the regulator will be. a major driving force, âhe said.
As banks continue to provide the regulated architecture that forms the basis for all of these services, regulatory steps and the construction of public digital infrastructure like IndiaStack play a crucial role.
There is an explosion of services and entities in the BaaSecosystem, neobanks, integrated finance, account aggregators, API aggregators, etc. A range of players from tech companies, market models, platforms / aggregators, fintech companies and startups are now leveraging banking APIs to reinvent the way financial products and services are accessible and provided.
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