For an insight into Banking-as-a-Service (BaaS), Finance Monthly connected with the Managing Partner of zeb - Bertrand Lavayssiere.

The rise of service-based platforms

Improving cost-income ratios by 15% or more is becoming a necessity for most financial institutions looking to win through in the new age of banking. Moving operations to a service-based model such as software-as-a-service (SaaS) and business-process-as-a-service (BPaaS) can help achieve this goal and free up the business to focus on its customers. Platform banking or as it is otherwise known as Appisation of banking IT systems, combine the advantages of outsourcing with the power of automation, ubiquitous access and virtually unlimited scalability. Yet the answer lies not just with technology, but with the business strategy. To achieve true simplification, banks must be prepared to critically rethink their business models and seek close alignment with the capabilities of these new platforms. Is now the right moment to move your business to the cloud?

Most banks are ill-prepared for the transformation ahead. Their bespoke structures, having developed gradually over time, are dogged by complexity. Bloated product portfolios, error-prone manual processes and antiquated IT architecture not only drive up the cost of operations, they severely limit agility. Consequently, implementing complex regulatory requirements such as BCBS 239 or GDPR, building fully automated end-to-end digital processes and integrating the latest products offered by FinTechs, is both cumbersome and costly.The effort required ties up banks’ capacities and prevents their top management from focusing on truly value-generating business issues.

Revolution not evolution needed

Doing away with this complexity that has developed over decades is not easy through a process of gradual evolution. More often, banks need to make a clean start. They need to critically reappraise their business and operating models, focusing on the parts that truly matter and radically simplifying the rest – streamlining product portfolios and outsourcing or standardising processes and IT systems.

This radical step involves a substantial revamping of existing process and IT structures. Here, we find that banks increasingly rely on the ready-made, standardised software and process solutions offered by external providers. Banks see these solutions as a fast-track to cutting complexity in terms of reduced resource consumption and shorter implementation times. They hope to benefit from reduced costs due to economies of scale in development and operations. Often, they also see these external solutions as a gateway to standards and market innovation.

Banks have several options open to them for integrating external solutions into their operating models. In practice however, banks often adopt a variety of approaches in different parts of their process and IT landscape.

One option is to adopt cloud-based service models such as ‘software-as-a-service’ (SaaS) and ‘business-process-as-a-service’ (BPaaS). This option has become popular thanks to a wave of technological innovations collectively known as ‘cloud computing’. But it is also the notion of ‘service’ – in the sense of a highly automated bundle of software programs and/or process functionalities – which makes this concept particularly interesting for banks striving for simplification. We believe that this option is of overriding importance for the future of banking. In other words, we have entered the world of ‘banking-as-a-service’.

How does the notion of ‘banking-as-a-service’ compare to traditional forms of outsourcing? The key distinction is the degree of standardisation and automation. Typical traditional outsourcing arrangements are highly customised to the needs of the client. Moreover, they are usually characterised by transfers of staff and technology infrastructure from the client to the provider, who may provide their services from a low-wage country, while the existing processes and technology structures are often retained.

By contrast, service-based models are built from the outset with standardisation and automation in mind. They are characterised by modular building blocks containing standardised pieces of business logic, for the most part executed by software with only limited human intervention. The result is straight-through processing (STP) rates of 90% or more for processes that are amenable to standardisation.

In the past, this type of standardisation would typically lead to unacceptable limitations with respect to business requirements for all but the simplest scenarios. But modern software architectures increasingly allow for ‘long-tail’ customisation – producing an additional variant of a banking product, service or business process, at virtually no extra cost. What used to be an exception, handled by a human agent, can simply be implemented as yet another process variation, handled autonomously by the software. In the world of banking-as-a-service, software no longer merely supports the business processes executed by humans: It becomes the process itself. We are witnessing the gradual transformation from software-leveraged processes to process-leveraged software.

Smart alignment

Reaping the full benefits of service models such as SaaS and BPaaS is a question of smart alignment to the capabilities and standards of the underlying platforms. Banks will inevitably discover some downsides to banking-as-a-service after they make the shift – some limitations and ‘gaps’ compared to traditional models. But the key questions are: Are those limitations relevant from the point of view of customers? And are they significant in terms of their impact on the bottom line or regulatory compliance?

These questions transform the topic of banking-as-a-service from a purely technological issue to a strategic issue. At the end of the day, it comes down to business strategy: Which products and services contribute to the bottom line? Which processes promote the overall excellence of the organisation? Do customers really value hand-tailored offerings? And are they willing to pay the required premium?

Far reaching decisions

Understanding which aspects of your business are truly differentiating and which can be standardised is a good foundation for throwing excessive luggage overboard before engaging in a large-scale transformation exercise. Ideally, the examination of technological options should already be part of the strategic discussion taking place at CEO level. Its consequences will likely require some far-reaching decisions.