How BaaS is Driving Innovation in the Digital Payments Space

Nanda Kumar is the CEO and founder of SunTec Business Solutions - the Kerala headquartered pricing and billing company that creates value for enterprises through its Cloud-based products. Kumar has been a technology evangelist in the software realm for almost three decades and specialises in customer-centric software platforms and solutions, specifically, for pricing and billing in transaction-intensive verticals. We caught up with him for a chat about the Banking as a Service revolution, and how new innovations are transforming the transactional space.

What is BaaS’ current positioning in the marketplace?

Traditional banks realise the need for additional revenue opportunities going beyond interest rates. Additionally, today customers are willing to move to alternate providers in search of better experience and offerings. Given the wealth of data and customer trust that banks hold, they are best positioned to create their own BaaS platforms.

In fact, in a survey that we conducted recently in collaboration with the American Banker, 97% respondents said they are building a partner ecosystem for digital banking where new products are the most common #1 objective. The survey further suggests that while payments processing, and customer fees are the most common revenue strategies now, bundling offers and monetising customer spending data are on the rise.

Non-bank businesses will require traditional financial institutions to provide them with the infrastructure, regulatory support as well as the utilisation of APIs. Financial institutions on the other hand can generate new revenue streams leveraging BaaS.

What new developments are happening in this space?

Neobanks and fintech firms are providing a seamless digital banking experience. However, they need a bank to offer cards, lending, money transfers, and other banking services. Fintech firms also have limited experience with compliance processes. A BaaS model, therefore, becomes critical in a highly regulated and competitive market. Banks have responded by enabling fintech firms and neobanks to have a bank’s resources and infrastructure to expand their offerings while lowering operating costs.

How does BaaS fit into new plans and developments for Central Bank digital currencies and decentralised finance?

Facebook’s announcement about introducing a global cryptocurrency raised the heat on central bankers, while China’s move towards Central Bank Digital Currencies (CBDC) brought renewed attention among major economy lawmakers. CBDCs may not be the very next chapter in digital payments as of now, but they are likely to become one of the next chapters.

When people use non-banking money transfer services, their money is the liability of that private company and is not insured. If that company becomes insolvent, consumers and merchants may lose their balances. With CBDC made transparent to consumers, these issues will get resolved. Many global banks are jumping on to the CBDC bandwagon for payments, settlement, pricing, billing, and revenue management.

As for Decentralised Finance (DeFi), it will enable parties to trade traditional financial products in a P2P fashion, replacing intermediaries like financial institutions. Banks must carefully evaluate the potential of DeFi to assess opportunities.

What major trend is shaping the BaaS space?

BaaS is becoming the solution to banking service needs of fintech firms and neobanks. It offers an opportunity for incumbent banks to increase the breadth of their offerings, while being the custodian of the customer’s interests. Banks can enhance their reach with offerings that go beyond banking products, thereby improving their engagement with customers. This means customers get access to more products and services that are personalised and serve their needs.

What does the future of BaaS look like to you?

As more and more fintech firms are looking for bank partners to provide banking services, there is a significant opportunity for banks to offer BaaS and develop new relationships with fintech firms, creating new revenue streams for themselves. However, exposing banking services through APIs increases the risk of cyberattacks and security breaches if not carefully managed. Technical and operational constraints, like legacy infrastructure can delay implementations and may require costly manual processes to overcome the limitations. In addition, banks must sustain the efforts to add new fintech partners to the portfolio. Banks can further align their business models and reduce the risks by partnering with an experienced provider that offers a secure digital layer that can integrate seamlessly with multiple systems and offer end-to-end connection of business data.