Knowledge Base

How Banking-as-a-Service Aligns Banks and FIs With New Customer Demands

In today’s world, banks and financial institutions (FIs) face many challenges. Among them are technological innovations, competition, changing regulations, and rising customer expectations. Fortunately, the same technological innovations accelerating the speed of digitalisation and increasing customer expectations also provide effective solutions to the banking systems’ limitations.

Banking-as-a-Service platforms 

There is a new crop of software services that provide financial service solutions to businesses, entrepreneurs, startups, banks, and FIs. These plug-and-play modules, called Banking-as-a-Service (BaaS) platforms, offer customisable financial technology solutions that bridge the gap between banks and FIs’ legacy core banking systems and customers’ changing needs and expectations.

Innovative banks and FIs that plan to survive must have a plan to replace obsolete legacy core systems with modern technologies. By leveraging BaaS platforms, banks and FIs can develop new products and solutions that respond to their customers’ needs, making them more competitive and future-ready.

Legacy core banking systems

Legacy core banking systems are the older existing bank systems that have grown organically over the decades. The term and the technology are outdated and barely meet current standards and the new, sophisticated financial needs of customers.

Legacy core banking systems which grew historically with the advent of banks support backend operations across core functions such as opening and setting up accounts, processing transactions, and processing deposits and loans. 

Due to the passing era of these legacy core technologies, banks and FIs face challenges like antiquated proprietary data models, which cause a limited ability to interface with modern technology and systems. Thus, legacy core banking systems restrict a bank’s ability to deliver good customer experience and modern products and solutions.

Banking-as-a-Service (BaaS) Benefits for Banks and Financial Institutions (FIs)

Banking-as-a-Service (BaaS) platforms make speed, mobility, and technical efficiency possible for banks and FIs. While modernising legacy core banking systems are already in motion in many banks and FIs, these institutions still need to adopt a quicker sense of urgency to match customers’ needs. 

BaaS platforms can help banks become more customer-centric by enabling personalisation through analytics with speed and at scale. A recent report on BaaS by PYMNTS and Transcard revealed that U.S. banks offering BaaS generated 200% to 300% greater returns on assets than other banks. The report also points out that banks and FIs provide a critical asset when it comes to what they can offer to BaaS platforms: institutional trust.

Other benefits of modernising banks and financial legacy systems with BaaS capabilities 

Reduced Costs

Banks and FIs can cut costs by collaborating with BaaS platforms. Such partnerships are fruitful for both parties. The banks can cut down on bureaucracy and old complex procedures and usher in an era of customer-centric financial services as partnering with BaaS platforms provides banks and FIs with insights through analytics, artificial intelligence, and machine learning. 

Banks and FIs carry huge IT operating costs, stemming from multiple layers of systems and code. The ever-spreading cost based on this existing system leaves less budget for investment into new, useful technologies, driving a cycle of increasing operating costs. This contrasts sharply from BaaS platforms, which typically have low operating costs, only paying for what they need when they need it.

Due to the limitations, many banks and FIs are cornered by their legacy core banking systems and now view investing in new digital systems as critical. The new BaaS services rely on cloud and other associated software services that cut down costs and reduce complexity for the banks and FIs. These help the banks and FIs digitalise aspects of their systems quickly, enhance customer experience, and launch new products and services faster and at less cost. 

Connectivity

BaaS platforms enable banks and FIs to connect their existing architecture to relevant endpoints, e.g., Enterprise databases, data warehouses, applications, IoT sensors, cloud services, etc. BaaS also links banks to useful Business-to-Consumer (B2C) connections, e.g., mobile devices, apps, wearables, and Business-to-Business (B2B) connections, e.g., systems at partners and suppliers level.

These systems are diverse and complex. Stable systems architecture balances control and accessibility and has strident protection against cyber-threats — two critical aspects banks and FIs should never overlook.

Many FIs still rely on the information security model from the core legacy systems, but information security risks have evolved over the past few decades, and banks can now efficiently upgrade their security and connectivity through BaaS platforms.

Market insights

As banks and FIs look to the future, one of the biggest challenges they face has little to do with the technology itself and more to do with customer understanding. For years, banks and FIs have designed their offerings from the inside out, starting the product design process with: “This is what we’ll offer,” rather than thinking, “What do customers want?” Today, this model no longer works, and banks need to upskill their IT talent to make sure they stay knowledgeable about the challenges of tomorrow’s technical environment and what customers want. 

As more consumers seek easy and quick payment solutions like P2P instant money and real-time payments (RTP), banks and FIs have a choice to make: dive in and get busy innovating for the post-pandemic economy or risk falling behind.

Flexibility

Flexibility is a core characteristic of BaaS platforms. While banks and FIs work to keep up with the banking shift accelerated by COVID-19, BaaS platforms can help them bridge the gap and connect with their tech-first customers in a collaborative strategy, enabling them to enhance their systems and products without entering into a long-term commitment of building inflexible solutions.

BaaS platforms enable banks and FIs to offer more flexible options to their customers, whether through virtual cards, real-time payments (RTP), P2P instant money, FX options, and other needed financial options personalised for different customer segments. 

Digitalisation

With remote work as the new normal, banks are more pressured to digitise customer details and balances to enable access from other parts of the world. To move from a paper payments legacy system, for example, there are few things around electronic handling and security of data that need to happen. BaaS platforms remove many of these barriers, providing digital KYC capabilities that verify customers’ identity through virtual channels in real-time. 

Customer intelligence—and the ability to act in real-time—is a significant trend affecting the financial services industry. To provide more value, it’s beneficial for banks and FIs to personalize the way they interact with customers based on the context of such exchanges. BaaS platforms provide the infrastructure and insights that can help Banks and FIs offer tailored customer experiences through a balance of humans and machines.

Improved customer experience

Very few people foresaw that customer experience would come to hold such a mighty hand over banks and FIs since they formerly gave little thought to customers’ convenience or sentiment.

BaaS platforms enable infrastructures that address advancing customer needs in the user-onboarding experience and enable banks and FIs to remain convenient, compliant, and secure while providing a smooth experience for their users. BaaS platforms, especially as a medium to satisfy savvy clients, are increasingly valuable as connectors between banks and their users, driving stronger relationships and better customer experience.

What this means for banks and FIs

“The percentage of global banking and financial institution executives who regard BaaS platforms as a threat has declined since 2015, according to a report by IBM. Now, nearly 80% of executives believe these platforms will help them differentiate themselves and compete better.”

This is a good indicator that banking and FIs are closer to moving from the old legacy core banking issues to innovative digital fixes powered by BaaS platforms.

Banks and FIs must start now to prepare their IT departments for more technology-driven changes. It is essential to improve legacy core systems and capabilities and compare the cost of maintaining legacy core systems, given the pace of technological advancements and disruption within the banking and financial services sector.

Banks need modern systems to cater to customer needs and stay in sync with technological advancements. By opening up their interfaces (APIs) to the BaaS platforms, banks and FIs can once again become the centre of a thriving financial services ecosystem. The seamless exchange of information via APIs would make it so much easier to integrate new product offerings and services. 

Are you looking to innovate your payment platform and improve client experience on your platform? Read about how Nium helped a global bank modernise its payments, and get started with our solution for banks and FIs.

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