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    Opportunities for innovative banking infrastructure

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    Banking as a Service (BaaS) has changed the way banking products are built and delivered. Consumers want access to financial products when and where they need it, and BaaS platforms allow businesses to offer these products on their own without the complexity and cost of obtaining a banking license. Can be integrated into apps and ecosystems.

    Baas providers are a sophisticated API layer between traditional banks and most fintechs. These can help fintechs reduce time to market, provide critical banking functionality, and even streamline compliance processes. For electronic money institutions (EMIs) like Revolut, we see BaaS running on Wagestream, which relies on Modulr for account opening and payments APIs, and Railsr for embedded payments.

    However, although BaaS players have achieved many innovations in the fintech space, they are still middleware providers. They rely on traditional banks to build shiny new APIs and UIs on top of legacy banking infrastructure, which persistently creates underlying technology and risk issues.

    Disadvantages of current middleware BaaS models

    • technology infrastructureQuestion again. Traditional banking systems are inherently inflexible and struggle to cope with the requirements of modern banking services. Integrating new technologies such as AI, machine learning, and blockchain into these systems is often problematic, if not impossible. These technologies require flexible platforms that can handle large-scale data processing and complex algorithms.this is
      Fintech costingOne in five people estimate they lose $11 million annually due to product delays, and 33% say they have lost customers as a result of service outages. Older systems mean higher maintenance and integration costs, and security measures for these systems also tend to be expensive. That's not all. Because these systems are often synchronous in nature, they are not ideal for the real-time demands of event-driven architectures (EDA) and create bottlenecks when processing large numbers of events. Given the age of infrastructure components, the knowledge of original subject matter experts (SMEs) is lost over time, creating key personnel risk.

    • The issue of risk. Fintechs that BaaS providers work with rarely have a consistent approach to onboarding customers, managing financial crime risk, implementing controls, or conducting audits and reporting. This makes it very difficult to understand the end users of banking products. Continuous risk assessment typically consists of piecemeal checks and tedious annual reviews, a manual process that consumes a lot of time and resources without providing useful detailed insights. Banks that provide underlying banking services to BaaS providers inherit the risks of their BaaS customers, and this lack of visibility exacerbates the risks. And given banks' limited risk appetite, banks often seek the most appropriate way to mitigate this risk, usually by “debanking” their BaaS provider (i.e. terminating the relationship). Without banks in the background, BaaS providers will be unable to provide critical infrastructure to the fintechs they serve, potentially losing customers and harming the end users of their products.


    The BaaS model is evolving

    In an ideal world, BaaS should be done by banks. But before that happens, banks need to fix two things: technology and risk management.

    Banks must focus on completely overhauling their core infrastructure to support speed, scalability, and ease of integration (rather than endlessly patching increasingly unstable and overwhelmed systems). (rather than tweaking). Most banks haven't done this because such overhauls are long, complex, and expensive projects that typically last beyond the tenure of the willing sponsor who wants to drive this change.

    But if banks can find a way to fundamentally rebuild their core infrastructure, the benefits to the fintech ecosystem will be significant. Fintechs no longer need to stitch together the infrastructure of a dozen different middleware BaaS providers, with all the costs and complex integrations. Instead, your bank could offer a one-stop shop for embedded bank accounts, payments, cards, and more. Because all data is recorded on the bank’s own ledger rather than being distributed across multiple platforms, the bank also serves as a single source of truth for all customers and transactions passing through the fintech’s systems. There is likely to be.

    All of this will lead to lower costs, increased speed to market, accelerated growth, and sustained success for young fintech companies in a competitive financial environment.

    Solving risk problems is much more complex. The main reason is that most banks are used to handling risk and compliance manually and have been slow to adopt automation technology. To reduce the risks associated with working with fintechs, banks need to establish a line of sight with the end users of their products: their customers' customers. One way he does this is by managing the onboarding process for end-users (i.e., the fintech's customers) and running customer due diligence and transaction screening checks on an ongoing basis throughout. This greatly reduces the need for annual reviews and spot checks of fintech financial crime prevention controls, but is only practical at scale if these processes are fully automated. It is a case.

    These clearly demonstrate that there is an incredible opportunity to fundamentally change the way BaaS is currently delivered. We need to collectively pivot away from our current practice of whitewashing fundamentally outdated technologies with surface-level “improvements.”

    In my opinion, it's not just about adding new layers to an outdated system, it's about creating something fundamentally new and efficient. The path to such a future is not without its challenges, but the rewards promise to be transformative.

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