How Embedded Finance & BaaS are Transforming India 🇮🇳
While COVID has thrown traditional banking operations in disarray but it has also established new fintechs in the financial services business.
With the Central bank’s push toward digitalization, we can safely assume that this trend will inevitably make fintech proliferate deeper into the incumbent bank’s market.
Fintechs like Open, Bajaj Finance, Razorpay, PayTM, and Cashfree have already created new benchmarks for customer experience and transparency
On one end traditional banks are losing market share - some of the visionary banks have acquired technology platforms to open up their infrastructure to facilitate 3rd parties (fintech).
This collaboration is popularly known as Banking-a-as-a-Service (BaaS).
What is Banking as a Service (Baas)
BaaS is an end-to-end model that allows third parties to connect with bank systems directly via API so they can build banking offerings on top of the providers’ regulated infrastructure.
Banks usually open up APIs to facilitate specific banking functions like
- loans, cards, deposits, insurance, payments,
Advantages for Banks
Adapting BaaS open up new revenue streams for incumbent banks and increases their customer reach.
The two main monetization strategies for BaaS are:
Monthly fee for access to the platform
A la carte for each service used.
Advantages for Fintech
BaaS is cheaper and faster for Fintechs
Fintech can focus on customer experience without investing in the long and expensive process of taking regulatory licenses and compliance.
What are the regulations?
European countries have already introduced PDS2 and open banking regulations
Big banks like HSBC and JP Morgan are working with solution providers like Salesforce to create a non-profit consortium – BIAN (Banking Industry Architecture Network)
In India, data privacy and BaaS regulations have yet to be formulated.
BaaS in India
BaaS is not new in India. YesBank and RBL Bank were leaders in the industry by opening several APIs to developers as early as 2013.
Currently, in India, API offerings exist from all major private banks like HDFC, ICICI, and Kotak,
These days BaaS is nothing short of a revolution in India.
State Bank of India partnership with Uber to provide vehicle finance to drivers.
RBL Bank collaborates with Razorpay for a digital merchant platform.
OPEN uses ICICI Bank APIs to manage payments, billing, and accounting for startups.
RBL is collaborating with Bajaj Finance to give vehicle loans across India.
Snapdeal and Freecharge partner with Yes Bank to provide instant refunds.
State Bank of India initially partnered with Cashfree for payouts and cash withdrawals.
SBI recently invested in Cashfree making them India’s 1st public sector bank to do so.
There are multiple BaaS FinTechs platforms that have raised huge funding and are all set to become Unicorns soon.
Banking-as-a-Service Industry Outlook
An open banking API ecosystem is not the end goal but just the start. It has opened up immense possibilities to embed financial services in every customer application.
It is expected that BaaS will reach a value of $7 trillion by 2030.
Those that act fast and secure the best strategy model to incorporate this newly designed banking will experience a substantial upside.
BaaS is a full-blown gold rush, and everyone and their mother is jumping on the bandwagon - Ron Shevlin
How Can a Bank Start Offering BaaS?
Banks need to transform their infrastructure into a composable Lego-like architecture where every block denotes a banking functionality consumed via an API.
To technically achieve such flexibility, banks need to modernize their core systems which can be a tedious task and requires investment.
At the organizational level, a product-centric approach is required for each banking function, rather than different teams managing the front end, back end, data, and infrastructure.
Finally, Banking leadership needs to incorporate deeper technical understanding and decision-making to construct the right strategy backed by sufficient investment and a partner ecosystem to leapfrog ahead of the competition.
However, those that wait for the right time may feel left behind in the fast-moving banking domain