Banking as a Platform (BaaP)

In the previous articles, we have already studied how banks are facing intense competition from fintech companies who are able to develop better and more customer-centric financial products because of having better technical skills. This increased competition has forced commercial banks to look at newer products and revenue models.

We have already studied the concept of banking as a service and open banking in this module. Banking as a Platform (BaaP) is another model which is being considered by commercial banks as they try to find new and innovative products to enable them to compete better.

In this article, we will have a closer look at what Banking as a Platform (BaaP) is and how it can change the future of the commercial banking industry.

What is Banking as a Platform (BaaP)?

Up until now, the information systems of most banks have been closed loops. This means that commercial banks use their banking platform to develop applications that are solely used by the bank.

In banking as a service, these applications use APIs to exchange data with other applications built on other platforms.

However, Banking as a Platform (BaaP) uses a different approach. This concept is based on the fact that the commercial bank already owns a platform. Hence, if fintech companies use any other platform to develop an application, they are just adding complexity and redundancy. The problem is that up until now, banks have not been allowing fintech companies to utilize their platforms.

The Banking as a Platform (BaaP) model advocates that commercial banks must allow fintech companies to utilize their platform in return for a fee. This means that commercial banks will no longer have to integrate with an external system to obtain data. Instead, the application will be developed on the banking platform itself.

Since the fintech companies will utilize the technological infrastructure of the bank, they will have to pay a recurring fee to the commercial bank. This will open up a new revenue model for the bank. In return, the bank will have to provide services to ensure data security as well as authentication of users.

Banking as a Platform (BaaP) is a concept that is trying to emulate what Google Play Store has done in the mobile application space. The bank will basically provide a platform for different fintech companies to create applications. The customers will then be free to download these applications and use them at their convenience.

Difference Between Banking as a Platform and Banking as a Service?

Banking as a platform and banking as a service are both new-age business models which have come up in order to help commercial banks compete with fintech companies. These are both models which enable collaboration between fintech companies as well as commercial banks. This is the reason that many people tend to get confused between the models. However, in reality, the models are the absolute opposite of one another.

On the one end, banking as a platform is a model wherein fintech companies are providing services to the commercial bank i.e. the commercial bank is the buyer and the fintech companies are the seller. On the other hand, commercial banks provide services to fintech companies in banking as a service model.

Many commercial banks prefer the Banking as a Platform (BaaP) model because it allows them to retain control of the customer-facing processes instead of providing unbranded white-label services to their fintech counterparts.

Different Types of Banking as a Platform (BaaP) Models

It is important to understand that since Banking as a Platform (BaaP) is still a nascent technology, there isn’t one particular model which has been adopted. Instead, there are several models in place as of now and each of these models helps commercial banks monetize the partnership in a different manner. Some of the most prominent models have been listed below:

  • Data-Based Model: As per this model, banks receive monetary compensation every time a fintech company accesses their data. In this model, the customer’s financial data is used as an asset by the commercial bank and is shared in return for a fee. Of course, the consent of the customer is taken into account before such data is shared.

  • Transaction-Based Model: This model is different as compared to the data-based model. As a part of this model, commercial banks allow third-party companies to use their platform. They charge a fee only when a transaction is made. The transaction fee may remain the same regardless of the size of the transaction which is made.

    In many cases, commercial banks also charge a listing fee before they allow third-party applications to be listed on their marketplace.

  • Revenue Sharing Model: The revenue sharing model is also very commonly used in Banking as a Platform (BaaP). This means that instead of taking a flat fee for every transaction, the commercial banks act as partners and take a fixed percentage of the revenue which is earned by the app periodically. A certain base amount of revenue may have to be paid to the commercial bank regardless of the actual sales.

The fact of the matter is that Banking as a Platform (BaaP) is an interesting technological innovation that is proving to be fruitful for the commercial banking industry. The end result of this technological innovation and its impact on the commercial banking industry will become visible over an extended period of time.

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Commercial Banking