The Impact of Technology on New Business Models in Banking

In the past, the banking value chain was fully integrated and closed to external parties. This means that banks developed their own software (or bought it from vendors), did not share data and only rarely collaborated with third parties on banking-related initiatives. In the near future, the banking value chain will transform into a more open ecosystem where banks collaborate with third parties and distribute their services through new channels using innovative technologies such as application programming interfaces (API). The end result will ultimately benefit end customers who will receive services directly embedded into their user journey, with greater flexibility, increased personalization and potentially lower costs due to increased competition and supply.

With Open Banking, banks provide third-party financial service providers (e.g. fintechs) with access to customer banking, transaction and other financial data, on request and with the explicit consent of joint customers. By enabling the sharing of customer data, open banking is creating a new era of flexibility and choice for consumers, but it is also increasing competition between providers. Banks can also benefit from open banking by changing their approach from being locked into customer data (which is often not used to its full potential) to being open to innovation through collaboration and even monetizing their data interfaces.

BaaS enables any eligible company, from a fintech startup to an established platform, to embed financial services traditionally offered by a bank – such as bank accounts, debit and credit cards, and loans – directly into an existing software product. The rise of BaaS is being driven by technological (e.g., software-as-a-service) and regulatory developments (e.g., open banking regulations). As BaaS providers, licensed banks can benefit in two main ways. First, they create new revenue streams by directly monetizing their platform and services as a BaaS provider. At the same time, they also benefit from increased reach through new distribution channels of their BaaS user partners. 

While BaaS can be thought of as the “how” – the infrastructure that enables a company to offer financial services without owning financial technology or regulatory licenses – embedded finance is the “what” – the financial offering that brands can use in addition to their core products. The key selling point of embedded finance for the end customers is convenience. Companies that embed financial services such as payment processing, accounts, branded credit or debit cards, loans and more, create a convenient one-stop shop for consumers with an uninterrupted customer journey. By adding financial services, non-financial companies can also create entirely new revenue streams.