In essence, companies that have previously had very little to do with financial services will make a significant portion of their future income from activities like lending, payments and savings.
Already this type of activity can be seen in action throughout many different sectors. Uber and competitor Lyft have created financial services that act like a bank for their drivers, for example.
Apple, formerly a computer company, is now offering credit cards to its users in the hope that they will become indispensable like the iPhone.
Many online retailers also offer their customers loans and payment holidays to facilitate payments. Most of these services are made possible through banking-as-a-service (BaaS) technology which allows non-bank businesses to tap into digital banking infrastructure that is provided by banking institutions.
How it works
Non-bank entities pay a fee to access banks’ BaaS platforms, which act as a blank slate for the external companies to build whatever product is desired.
This is why the service is often known as “white label banking” as it allows the non-bank to create its own branded products for its customers.
The bank opens its application programme interface (API) for an external party to use as a base – similar to “open banking” where non-bank entities share data with financial institutions.
The main driving force behind the business model is that central banks across the world often require companies to meet strict regulatory requirements when dealing with financial services.
In effect, financial service providers are required to obtain banking licences which impose significant capital requirements and compliance with regulation on money laundering and deposit protection.
The licence is often difficult and expensive to obtain and therefore non-banks usually prefer to partner with a bank through BaaS platforms.
This presents a huge opportunity for banks to increase their revenue streams by charging clients a monthly fee or a set fee that charges card networks for using banks’ payment rails to move money.
More often than not, banks will offer services to fintechs in a defensive manner to ensure that the external company is not poaching its clients, though BaaS can also be used in a proactive manner.
Opportunity in Africa
While there are already plenty of examples of BaaS in Africa, many of the continent’s brick and mortar lenders are struggling to embrace the global move towards digitisation.
This represents a wasted opportunity in Africa as collaboration between banks and non-bank entities can offer mutual benefits if both entities establish clear value propositions.
Skaleet, a Paris-based company that provides core banking services to banks in Africa, Europe and Latin America, has recently been expanding in Africa, providing BaaS services to banks and other players.
Indeed, although banks often sell BaaS to external clients, the API which sits on top of the lender’s infrastructure is often provided by a third party.
Skaleet, a technology-provider which has a presence in 22 African markets, recommends that African lenders adopt the software to ensure they will not miss out on the fintech boom.
“With the explosion of the number of African fintechs, banking-as-a-service is a unique opportunity offered to legacy banks to build inclusive and local digital ecosystems to better serve the population,” says Yves Eonnet, chairman and co-founder of Skaleet.
As more and more startups and companies in Africa move towards auxiliary financial services, banks must be ready and willing to capture the opportunity to expand into innovative and diversified revenue streams.
Many of Africa’s agritech and FMCG-focussed startups, for example, have started offering finance to smallholder traders and businesses on top of the core business.
Banks must view this as an opportunity to sell BaaS services to Africa’s rapidly developing tech ecosystem, creating a “win-win” situation for both parties.