THE SHIFT OF FINANCIAL SERVICES FROM BANKS TO NON- BANKS OR IN OTHER WORDS: “ALEXA MOVE MY BANK ACCOUNT TO AMAZON”
When Amazon Web Services (AWS) was launched in 2006, IT changed forever. In the pre-AWS age, companies had to spend precious time and resources building their infrastructure from scratch – setting up data centers and networks, purchasing hardware devices and physical storage, and spending on maintaining and securing the equipment. A technology company couldn’t get off the ground without first tending to these issues. When AWS came along it offered an alternate path – use Amazon’s cloud infrastructure as a service and have your business up-and-running incredibly quickly. AWS transformed major technological hurdles such as storage, security, and scaling, into a subscription-based pay-as-you-go service that allows enterprises to focus on what matters most – their core offering.
A similar paradigm shift is taking place in the Finance industry. The rising demand for digital financial services together with the recent changes in banking regulations are encouraging non-banks entities to look for a share in the market. Suddenly, anyone wants to offer us a loan or a credit card. But, how can they do so? A new kind of solution called banking as a service (BaaS) is now taking off to allow non-banks to launch their own financial products. And much like AWS spared the need to set up a data center before launching a new technology product, BaaS is putting away the tremendous effort of building a financial framework from the ground up in order to launch financial products.
In this blog post we discuss the factors that led to BaaS, and introduce Railsbank, a “bank-in-the-box” company that Moneta has recently invested in, which enables its clients to launch financial services at unprecedented ease and speed.
Everyone Wants in on Financial Services
The demand for fast and accessible services has reached the finance industry as much as any other. Consumers expect to be able to perform real-time online transactions and to have access to financial services at all times. Fintech companies have sprung up to meet these needs, but they are by no means the only players in this space. In recent years, consumer-facing enterprises such as retailers, tech, and insurance companies have been looking for ways to provide their clients with financial services such as branded credit cards, loans, managed accounts, and international transfers. Uber, for instance, already offers an Uber Cash digital wallet, as well as a co-branded credit card with Visa, and has recently begun to explore the option of providing loans to its drivers. Essentially, more and more entities want to start functioning as a bank, at least partially.
It makes sense to want in on financial services – the market potential is huge. The value of payments for example,was evaluated in 2017 at $1.2 trillion, representing 20%-25% of global banking revenue. Stripe got a slice of that cake by creating an online payments platform. But most financial services are trickier than Stripe’s solution and are in fact much more complex and difficult to launch and to scale. Let’s take a closer look at why this is more complex.
The Challenges of Delivering Financial Services
No matter if you are a small Fintech company, a tech company like Uber or Facebook, or a giant retailer like Macey’s, providing the smallest of financial services requires a lot of effort and resources, including financial expertise, cultivating multiple partnerships, technological ability, infrastructure, and obtaining regulatory licenses.
The first major challenge when launching a financial service is that it depends upon the creation of an entire financial ecosystem. No matter how great the financial service itself, it will not succeed in the market without strong partnerships with banks, card networks such as Mastercard or Visa, as well as manufacturers of card processors and card printers, all of which incur enormous costs and negotiation time. Furthermore, additional partnerships must be established with third parties that can perform crucial security procedures such as KYC (Know Your Customer) and AML (Anti Money Laundering). So the financial service is actually just the tip of the iceberg, and must in fact be supported by a whole ecosystem in order to be delivered successfully.
The second, and perhaps the trickiest barrier when deploying a financial service is regulation. You must have a license for every type of service you provide. For instance, an e-money license is required to provide digital wallet services and a banking license to be able to lend money to your customers. These licenses and regulations vary across markets and countries, making it especially difficult for companies to expand their products portfolio and to scale geographically.
As a result, the process of launching a financial service is still slow, complicated and expensive. Banking as a service (BaaS) is a new trend that offers an alternative route that can potentially transcend these challenges and barriers.
The Walls are Coming Down: Banking as a Service (BaaS)
Fintech is finally catching up with Bill Gates’ mid-90s statement that “banking is necessary, but banks are not”. In this new paradigm – BaaS (Banking as a Service), banking functionalities are delivered as a SaaS – as a platform upon which companies, from within and without the finance sector, can deliver financial services and products. In other words, a shift is occurring from consuming banking services to consuming financial services directly. With BaaS the walls of the banks are coming down, creating a world where everyone could potentially function as a bank.
How does this work?
At the heart of BaaS are APIs (Application Programming Interface), which allows third party companies to integrate into its licensed and regulated banking back-end. This way, companies’ developers get ready-to-use high-quality banking functionalities without spending precious resources to build them from scratch, freeing them up to focus on their core product.
BaaS platforms use APIs to be much more than a technological mediator between companies and banks. BaaS, at its fullest potential, is a software bank that lays out a comprehensive banking infrastructure that plugs into other banks, credit card networks, vendors, etc., via APIs. The potential here is immense. Companies that previously had to toil away for months or years, setting up their own technological infrastructure, negotiating terms with multiple entities, worrying about compliance and regulations – could now bypass all of these issues, and plug into a BaaS platform to integrate financial services into their business immediately.
Despite its vast potential, BaaS is still an emerging trend and as such there aren’t many companies out there with a comprehensive solution that tackles all the aforementioned challenges.
As a Fintech focused fund, Moneta has long been interested in new models such as BaaS and Neobanking. Our attention to the emerging BaaS space increased when we heard of a UK based startup, called Railsbank, from one of our portfolio companies that was using it to ramp up its global operations, and attested that it was the fastest and most efficient BaaS solution out there. When we took a deeper look, we found Railsbank to be a platform whose strong architectural approach enables simple integration, operation, and expansion of financial services at unprecedented speed.
When we assessed the potential of BaaS, we realized that at least 50% of our portfolio companies could have saved much time and resources had they could leverage a BaaS infrastructure and focus solely on their unique selling preposition instead of building financial infrastructure and obtaining licenses. This understanding has triggered our deep study of Railsbank which resulted in our recent investment in the company.
Introducing Railsbank: “Launching a Bank with 5 Lines of Code”
Moneta Capital has recently invested in Railsbank, a BaaS platform which enables enterprises to set up full financial services for their users incredibly quickly and at a low cost. Railsbank allows Fintech companies as well as retailers, insurance companies, and basically any consumer-facing organization, to incorporate core banking services into its offerings instantly and seamlessly. It comes with out-of-the-box back-end and front-end systems, which can be configured and branded to meet the client’s needs. Railsbank’s offering also comes with full API support to develop custom applications using a complete banking rails infrastructure. Its API model is comprehensive, and includes real-time authorization, a compliance firewall, AML, and KYC.
Railsbank solution eliminates the need to handle regulations and build a financial ecosystem separately for each entity and geography. This allows its clients to scale and deliver their services seamlessly and incredibly quickly across multiple markets. The life insurance company SingLife for instance, used Railsbank to develop a fully operating digital banking app, complete with its own debit card, bank transfer support, and dedicated account numbers within two days.
The Company was founded by Nigel Verdon, the founder of Currency-Cloud, one of the leading online remittance players, together with his colleague Clive Mitchell, a financial services executive with over 25 years of experience. The Company launched its service in the UK as a full platform with regulatory license and has recently expanded to SouthEast Asia.
We believe that by the year 2030 most financial services will be offered by anyone but the incumbent banks. Uber drivers will use Uber as a bank, EasyJet clients will pay for their vacation with their EasyJet bank account, Facebook users will use Libra to receive their paychecks and Amazon users will ask Alexa to open their bank accounts.
The infrastructure for this massive paradigm shift is already on its way – the “train tracks” are being laid down as we speak. Railsbank allows its customers to instantly bypass the hefty challenges of integration, scaling and regulation that make it so difficult for startups and enterprises today to launch a financial service. When someone lays down the train tracks for you, it’s time to climb aboard and leave your walking boots behind you.