The FinTech industry is evolving at an exponential rate. The competitive landscape is changing thanks to innovative technologies. As new services arise, existing financial companies face the challenge of startups who wish to dethrone them. All sorts of financial companies are entering a competition not seen in decades. Opportunities arise, but so do the challenges. Innovation has become necessary to stay afloat. Although the industry’s expected outcomes are uncertain, there is one solid conclusion: legacy banks and new players alike have a lot of work to do.
At Koombea, we believe that one of the main frontlines in which this financial competition will evolve is in Banking as a Service. This post discusses Banking as a Service and how it is reshaping the FinTech industry.
What Is Banking as a Service
Banking as a Service (BaaS) refers to financial services provided over the web. It is often referred to as on-demand banking because it is available 24/7. BaaS services usually use the data of a legacy bank, which is made available through the possibilities of cloud computing and open banking. As a result, what used to be a series of various financial processes and activities to meet clients’ needs are being reshaped into more unified and efficient ones.
BaaS allows FinTech companies to make use of users’ financial data for various purposes. The most common of them is to offer financial services that require a deep understanding of a given user’s credit score.
Imagine the following example of how it works. The user of a FinTech app that gives out loans will first need to authorize the use of his data. After the authorization, the app can use this information to calculate risks and conclude whether the loan is viable. If it is, the user may be eligible for the loan, otherwise, the loan request gets rejected. Something similar occurs with other core financial services offered under the BaaS modality.
What Is Open Banking
BaaS can be offered by legacy banks themselves or by third parties who have access to users’ financial data. Open Banking is the way in which third parties get access to users’ financial information. As mentioned above, users must first give approval to legacy banks, who usually own the data, so that information can be shared with third parties.
Third parties have to pay a fee in order to access users’ data. Accessing this information is done through Application Programming Interfaces (APIs), which retrieve the necessary information. It is very important that whoever uses the data guarantees PCI compliance.
Regulation & Security
Regulation & security issues are very important when it comes to FinTech. This is because users’ data can be very valuable for companies, and therefore privacy needs to be protected. Different regulations exist, so it is very important that FinTech companies comply with whatever rules apply to them. Not doing so may result in sanctions, and even worse, in a reputational liability.
The same goes for security. Users need a guarantee that their transactions are safeguarded against fraud. One of the most common ways in which FinTech companies guarantee users’ security is through robust authentication protocols. That way, malicious actions are blocked from accessing users’ accounts. Other techniques exist to guarantee FinTech security, but many startups don’t have the expertise or personnel to develop such solutions. That’s why having the right FinTech app development partner, like Koombea, is key for many FinTech startups.
The Rise of Fintech Startups
FinTech startups are challenging traditional banks. What once seemed like an industry safeguarded against disruption is now being tested. Thanks to the possibilities of BaaS, the financial landscape is changing throughout the world. Competition is strong and everyone wants their piece, fueling innovation in order to succeed.
In some cases, startups are the perfect ally for legacy banks, especially when an interesting business opportunity exists beyond the legacy banks’ traditional business model. In other cases, startups and legacy banks compete hand to hand. In the end, it is the users who benefit from this.
Take for example the case of Payix, one of Koombea’s clients that is disrupting the financial industry. As a FinTech startup company, it provides collection tools, payment processing resources, and business process optimization solutions to U.S. lenders and loan servicers. Payix saw an interesting business opportunity to meet borrowers’ needs, one that traditionally lenders had neglected. Since then, it has been adapting to fulfill that need by delivering its vision of how loan collections and borrower communication should be done. Thanks to its easy to use white-label platform, borrowers can keep in touch with and make payments to lenders through various channels, facilitating and optimizing the entire process.
The Reinvention of Legacy Banks
Legacy banks need to reinvent themselves in order to compete or cooperate with new players in the FinTech market. This has fueled a wave of innovations, particularly in apps that offer specific financial services. However, it is becoming more and more difficult for some banks to stay in the race.
In order for traditional banks to stay afloat, they will have to reinvent many of their processes. In some cases, partnerships with new players will become strategic assets. In general, any strategy will require some heavy doses of innovation, like implementing technologies such as AI and Machine Learning into new financial products. The use of big data and achieving economies of scale are going to be two of the major drivers of growth in the BaaS landscape.
What BaaS Means to Clients
Clients will be the ones who benefit the most from financial innovations and competition. However, there are many challenges that the industry still needs to face. Take the case of the U.S., one of the major players in the BaaS FinTech revolution.
According to the Center for Financial Inclusion, 1 in every 10 Americans lives below the poverty line. For people under this condition, it is almost virtually impossible to access traditional financial services. Creating solutions that deal with such problems is one of the many ways in which everyone can benefit. This becomes particularly important as the current pandemic hits many households’ incomes. At Koombea, we believe that there are many opportunities to help in this specific issue. Many apps will appear in order to face the challenges of improving financial inclusion conditions.
For the case of users above the poverty line, it is expected that traditional financial services will continue migrating more and more towards more digital-friendly alternatives. More sophisticated financial services will be available, hopefully delivering great user experiences that simplify processes and the user journey. It is important that brands connect with users at an emotional level and not just as another financial alternative in the market.
Reshaping the Financial Future
Thanks to the possibilities that mobile devices offer, we can now carry our banks in our pockets. The trend, which has already begun, is that apps will dominate financial services. Apps that are able to deliver great experiences will be the ones that survive throughout the industry’s intense competition.
Bringing great apps to life is a process that many companies in the financial industry don’t understand. For reasons like this is that companies like Koombea exist. Our years of experience in FinTech app development have given us the necessary expertise to meet the needs of the financial industry. Don’t just take our word for it. Find out how we’ve helped some of our clients.
If you are thinking about developing a great FinTech app, contact us. We’d love to hear about your ideas and discuss how we can help them become a reality.