Software as a Service (SAAS) offerings, also described as Banking as a Service (BAAS) and Platform as a Service (PAAS), together with regulatory relaxations, have opened a whole new world to businesses that have traditionally been excluded from operating inside the hallowed halls of traditional financial services.
Customers are the primary beneficiaries of this fast-evolving new financial world because it’s a business model in which their needs are put first. The wide array of fintech solutions coming to market are all carefully designed to meet their existing and future needs — and those they didn’t even know they had — in a far more efficient, intuitive, pleasurable, and cost-effective manner than traditional financial services.
The providers of the “as a service software” are the technology companies that build the software and lease it to non-financial businesses or emerging fintech firms who want to take an innovative financial proposition to market without the expense and extensive timeline usually associated with building a digital business from scratch.
BaaS providers develop the different components of a technology stack, enabling neobanks to offer, for instance, payments, debit and credit cards, forex services and loan provision facilities. In gaining access to ready built technology, the neobank can concentrate on building a large and loyal customer base by giving customers a seamless experience and standing out from the crowd.
For a complex industry that has had such high barriers to entry, BaaS makes entering the lucrative financial services industry a breeze. But behind the hype, there are drawbacks in the as a service approach to building a digital bank.
For one, all SaaS offerings claim to have similar goals: to provide financial services companies with banking and software infrastructure to a) reduce costs b) improve time-to-market c) help with regulatory requirements and compliance. If that’s true, all neobanks and other fintech companies could essentially become marketing companies by using the existing software and banking services of these vendors and not have to worry about the technology engine that drives their businesses.
There are examples of other industries in which that has been the case, particularly ecommerce, where online retailers, like Shopify, don’t have to manufacture products, manage the supply chain, or develop the code for their website before they start selling their products online. Red Bull is another new-age company that has become a pure marketing company that has been able to scale the business while outsourcing its manufacturing and supply.
The same has been true for the popular neobanks. All of them started operating with cloud-based SaaS solutions but they then had to switch to building their own core systems as they expanded their services and scaled their businesses. Now each of them employs thousands of engineers inhouse who are responsible for maintaining and further developing the banks’ digital operations — an indication that the banking SaaS industry still has a long way to go until it reaches the level of sophistication achieved in ecommerce or CRM/ERP solutions.
Why is that? Feedback from our clients highlights the most common issues they have encountered when considering, or opting for, an “as a service” platform. These include the following:
- Take it or leave it. This is a common and the most important issue with many of them. Clients often need some help and flexibility but face an attitude where they must take it “as is” or go to another vendor. Customers see it as a significant risk to their business, in the ever-evolving world you never know exactly what kind of product and features the market will need and if your SaaS vendor is not responsive, it puts business at risk.
- Available resources. Many of banking SaaS companies are relatively small and often understaffed. So, even if they are willing to stay agile and help their customers to grow, they just can’t do it. And staffing means a lot here. To get an effective system of hiring, training and retaining people takes years to build and requires special competencies.
- Partner Ecosystem. Many of the SaaS companies are trying to accelerate partnerships to expand product offerings and meet customer demands. However, it is still early-stage and looks like we’re still far away from seeing fintech platforms similar to Salesforce or Shopify.
Despite the introduction of open banking initiatives, updated regulatory requirements and appearance of many fintech-enablers, companies are still facing challenges with the software infrastructure. It is fragmented and often can’t serve products through the entire life cycle. Those who consider starting new products should pay more attention to banking software company characteristics rather than the product features they offer.