Bain Capital predicted that the global addressable market for embedded finance could be worth USD 7,2 trillion by 2030, with the US alone potentially reaching a worth of USD 3,6 trillion. Who are the key players in this new landscape across technology, financial services, and across every segment of the economy?
Banking-as-a-Service and Open Banking are considered disruptive innovations for the industry, BaaS being referred to as a way to evolve towards Open Finance. Could you let us know how do these initiatives relate to each other?
Open Banking is often misrepresented due to confusion in the media. Open Finance is, in my opinion, just another word for Banking-as-a-Service (BaaS). Open Banking does two things: it gives you access to account data that you can aggregate and it allows payments initiation. It’s a very limited number of use cases that it’s useful for. For example, you couldn’t start a neobank or a lender by just using Open Banking as a data source or the ability to have a cheaper way of sending money which is what we use on the merchant side. It’s a start for banks to open up access to your bank data and give access to third parties. In some use cases you can’t build any massive business on it, you can’t build another Monzo or Chime with Open Banking because it doesn’t provide any support for that.
BaaS has all the components you need to build any financial product - issuing a bank account, sending/receiving money, issuing accounts, controlling cards, issuing credit, issuing insurance - which you can use to build a neobank, or a lender. BaaS allows any business to build financial services products or any business to become a fintech. Open Banking only gives 5 or 6% of the functionality of BaaS.
Open Finance is being used interchangeably over the past year because there hasn’t been a clearly defined segment yet, until few months ago when it started to be called Banking-as-a-Service, making it synonymous to BaaS.
Which segments of the economy (from existing embedded payments like Uber or Shopify to lending or insurance) have most to benefit from BaaS? Could you please give some examples of consumer end users but also SMES and corporate use cases?
You can think of BaaS as Lego. If you are an entrepreneur in the retail, property, or airline industry and you want to include embedded finance in your customer experience, you would use BaaS. For example, a property manager might want to have account issuance for every apartment that they manage. In the rental collection use case they could have automatic reconciliation of rental collections which would make it a great experience for the landlord and the management company. UK’s Goodlord is such an example, with embedded bank accounts, sending/receiving money, and accounting embedded in the property management customer journey.
Another use case is when supermarkets created open loop reward programmes because they wanted to see where Nectar points are spent in other supermarkets, for example. BaaS can provide reward points as a banking product. Then, you can see when your customer goes to a competitor and find out how much and when they spend money so you can provide better offers. Supermarkets are using embedded finance as a way to boost customer engagement and marketing to customer.
What is Railsbank’s current position in the BaaS market and what are the main differences between the US and Europe when it comes to approaching BaaS?
In Europe or the UK we use e-money licences to hold deposits, make payments, and issue cards, among others, except lending which we can’t do under an e-money licence. In the US you would need a full banking licence, such as it is the case for Green Dot or Cross River Bank. However, neither of them left the US market to go international. They resemble old fashioned banks, they have massive cost structures behind them so they can’t take on small clients which doesn’t allow them to help facilitate any market. In the US you have software-only companies, like Synapsify, Bond, or Marqeta, which provide software layers to integrate banking partners together in the back-end. The issue here is that you have to find a banking partner, a card issuing BIN sponsor, a card processor, a general ledger provider, which makes the US market massively complex and archaic as opposed to Europe.
In Europe you have Solarisbank and ClearBank, which have been in business longer than Railsbank but they haven’t left their own countries. Starling Bank is different because it has a BaaS platform but they also compete against their customers for the same consumer base. E-money licenced players like Railsbank, Bankable, or Modulr are more lightweight.
Railsbank completely owns the operational stack meaning that we operate with a certain clearing, reconciliation, and the other pieces needed to conduct a financial service business. Because we are regulated, our customers can rent our licences which allows them to go to market faster. In the US you can’t do that because you would have to spend millions of dollars.
The real difference between Europe and the US is that in Europe Railsbank owns the economics from the customer to the Bank of England or Visa. In the US BaaS providers own only part of the economics.
In Southeast Asia, besides Railsbank, there is Nium, which isn’t a pure BaaS platform, nexus from Standard Chartered, which probably has only one customer as far as I know, and OneConnect from Ping An which is only used in China.
Could you please explain banks’ attitude and approach towards BaaS? Do you feel that they see it as a threat or as an opportunity?
The smart banks will accept BaaS and the dumb ones might go bust. There’s an excellent Gartner article saying that heritage financial companies avoiding digitization will go bust by 2030. When COVID-19 came Barclays and others couldn’t lend because they spent billions of dollars in digital transformation and all they have done was to transform an analogue process into an analogue process on a browser or PDF.
Our viewpoint is the following: to build a car in 5 minutes – a Cavalier used to come out of the Luton plant once every 5 minutes – you would need 3-4 million parts at the other side of the plant and a fine-tuned building process; this is called just in time manufacturing and was invented by Toyota. That’s what we want from financial services. Unless you have just in time manufacturing or just in time processes, you will never be able to become a truly digital business.
Banks remain in that ‘we’ll do it our way’ mentality and don’t realise that the world is going digital. What’s going to drive them towards BaaS collaboration is the fact that we have the technology which they won’t have for years to come. The industry will restructure itself just like it happened with the music industry when the labels first lost their power and regained it in a different way.
Banks can be the whole salesman into BaaS, which disintermediates them but, looking at old numbers, it will be better for them. For example, if my cost of running an account is 10 cents/month and a bank’s cost is 15-20 dollars/month, it is difficult for banks to do small financial services. Or, if I can originate a loan for 10-15 dollars, banks originate loans for 350 dollars. Either way, banks stand to lose money if they don’t change their mindset.
What do you think about banks going towards becoming BaaS providers (e.g. BBVA’s 2019 US launch of its BaaS Open Platform)?
BBVA’s launch didn’t go as planned, in my opinion. BBVA’s Compass never comes up in conversations with competitors. Simple bank, which they bought, never migrated on BBVA’s Banking as a platform service. BBVA was at in the forefront 5 years ago but now you can’t say that they are still in the market, they didn’t manage to make BaaS work for them.
In December 2020, Railsbank increased its offering with two new products: the Houston no-code platform and the OpenRailz API. What benefits will users have and to whom are they addressed?
If you look at Trulio’s solution for building telco experience (adding drag and drop functionality), we are doing the same for financial services with Houston. You now have different ways of building a financial experience, using our APIs by actual developers and SDKs by not-so-sophisticated developers. Product managers are empowered by Houston to be able to design a financial workflow experience using all our components. Railsbank deconstructed financial services into individual digital components (bank accounts, send/receive money through SWIFT, UK custom payments, SEPA and others, card issuance, or issuing insurance policies).
These can then be reconstructed into financial use cases. This is what Apple did with iTunes. They deconstructed the music industry and changed the economics of the industry. You didn’t have to pay USD 20 for an album, you could just buy the song you wanted. The music industry was on its knees because the economics changed and it had since adapted and started massively booming again. That is what Houston sets to do for the banking industry.
OpenRailz allows us to open up our back end. If you are a third-party bank and you want to distribute your deposit accounts, loans, and others, you can do so on our platform for consumers and SMEs. OpenRailz provides open access the way merchant APIs such as Amazon’s are doing.
Everybody seems to be doing BaaS now, everybody launches new APIs, but the thing is that there’s nothing differentiated by their APIs. We invented that in 2016. What we bring new to the table is represented by destructured financial components, tools for product managers, and APIs to allow anybody to come into our toolset to access our consumers and customers for distribution.
About Nigel Verdon
About Railsbank
Railsbank is a UK-based Banking-as-a-Service provider with a mission to deliver a seamless product to companies through a technology platform that moves past the legacy issues. Railsbank does that by bringing together banks and businesses to transact digitally and in a fully compliant way.
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