Enabling Banking-as-a-Platform with Cloud Native Technology

The shift towards cloud-based systems doesn’t mean the global banking industry has not been left out of the conversation on digital transformation. Banking industry leaders are migrating their legacy systems to embrace modern cloud-native architectures. As these industries advance their software, hardware, and databases to more optimized, agile, and robust systems, the banks of tomorrow will be entirely different from what we know today.

Research by the Economist Intelligence Unit (EIU) for Temenos reported that 34% of respondents want to adopt AI, and 40% are migrating to the cloud for business agility, elasticity, and scalability. The most established financial institutions are capitalizing on the benefits of cloud computing by adopting cloud services to streamline costs and enhance customer experience. Banks are transforming beyond ecosystems that just offer financial services to digital platform services that include products and applications from third-party providers, offering a one-stop shop for customers’ financial needs.

This article will discuss and explore the adoption of cloud-native technology in banking and the advantages and challenges of this shift in the banking industry. You will also see how banking as a platform could revolutionize the idea of banking as a whole.

The rise of banking-as-a-platform

In the 1900s, banks were primarily custodians for managing the risk between assets and liabilities and safekeeping cash and valuables. Driven by the natural evolution into a complex economic system, they started giving business loans and providing facilities to make payments at the branches. 

However, with the rapid technological evolution and the growing pool of venture capitalists seeking promising FinTech startups to invest in, the banking sector came to a crossroads: innovate or perish. 

Today, many traditional banking institutions face challenges and threats from these FinTech companies that can easily evolve to meet the ever-changing customer demands. 

To address this, traditional financial institutions are decoupling their technology infrastructure (tech stack) to embrace modular business models: Banking-as-a-Platform (BaaP) and Banking-as-a-Service (BaaS). These platform-based models have stood out and received attention from banking executives and experts in recent years because they are more customer-oriented and offer seamless and user-friendly services.

How is it different from banking-as-a-service and open finance?

BaaS is a business model in which licensed banks offer their core banking functionalities (payments, account management, etc.) to other companies through APIs (Application Programming Interfaces). It is easier and faster to launch a neobank or payments business by offering white-label banking services such as holding funds, connecting to local payment systems, and issuing cards. 

However, unlike the open banking model, which allowed third-party companies (Fintech companies) to securely access customer data from their bank account with customers’ express permission, BaaS goes a step further. BaaS allows non-banks to integrate financial services directly into their platforms and applications without building their own banking infrastructure.

The ultimate goal of open banking was to enable account-to-account payments (bank transfers), compete with market demands, and allow consumers to pay directly from their bank accounts in shops and online via credit cards. 

BaaS gave banks a competitive edge by enabling them to capitalize on their technological assets and years of expertise in primary areas, such as payments. It also made it easy to reach a large population of clients while keeping acquisition costs down by partnering with non-banking services that leverage embedded finance for significant revenue growth.

Even at the crossroads, most financial institutions are switching contexts between BaaS and BaaP. However, BaaP is ushering in a new era of financial services by delivering exceptional benefits and creating unparalleled value for customers. A market research study by Juniper Research predicts a significant surge in BaaP revenue. They forecast global BaaP revenue to reach $49 billion by 2028, reflecting a massive increase from $4 billion in 2023.

What is Banking-as-a-Platform?

The rise of digital banking platforms has shaken things up. New FinTech companies offer innovative financial services at the swipe of a finger, often at a lower cost than traditional banks. BaaP reimagines how banks and big technology companies work together. It creates an open digital marketplace where banks leverage fintech innovation to offer a richer suite of financial services to banking institutions. 

Unlike traditional banks, which often build everything themselves and only offer their products through retail banking at their branches, new-age platform banks act as hubs. Banks and other financial institutions rely on software and service technology enterprises to supply applications, development tools, middleware, operating systems, virtualization, servers, storage, and networking. They combine various financial products and services (e.g. Mia-FinTech) from different platform providers on a single platform for customer convenience using Open APIs. 

BaaP business model simply means that a fintech or any other software/technology company can develop a tool or service that banks can “rent” and integrate into their offerings. A banking service provider can achieve agility in launching new banking-related services and venturing into new markets, all while maintaining customer loyalty.

Key challenges and risks of platform banking

While convenient for users, platform banking comes with challenges and risks that financial institutions must overcome to ensure successful implementation. These include:

• Operational complexity: BaaP is a fairly new concept that integrates various financial services, third-party FinTech applications, and external partners. This can be a complex task, with challenges like ensuring smooth data exchange, maintaining compatibility between different systems, avoiding technical glitches and business disruptions, and ensuring a consistent experience across the platform. Managing this diverse ecosystem of partners and services requires effective coordination and collaboration, which banks must invest in.

• Integration issues: Platform banking thrives on collaboration, but integrating various systems, APIs, and services from different partners can get complicated. For a smooth customer experience, banks must ensure seamless interoperability, where everything works flawlessly together. This can be a challenge, as compatibility issues, inconsistent data formats, and mismatched APIs can arise, creating roadblocks to efficient collaboration. Additionally, the collaboration between these systems requires the sharing of customer data across different platforms, which raises concerns about how that data is handled. If an API is exposed, it can become a potential entry point for attackers. And a data breach in one system can lead to severe consequences across the other systems. 

• Regulatory compliance and governance: The continuously evolving nature and interconnectedness of platform banking present a challenge for regulators. Keeping up with innovation while ensuring consumer protection and financial stability requires constant regulation adaptation. Banking platforms themselves also need strong governance structures and compliance in multiple jurisdictions to avoid legal disputes and manage the risks involved.

Impacts of banking-as-a-platform on financial institutions

• Enhanced customer experience: BaaP is a customer-centric approach that enables banks to provide a one-stop shop for all financial needs through third-party relationships with budgeting software, investing platforms, and loyalty programs. This can result in a more convenient and personalized banking experience, which can increase customer satisfaction.

• Agility and time-to-market: Traditionally, developing new financial products and services within a bank can be slow and cumbersome. BaaP allows banks to leverage pre-built solutions and functionalities from third-party providers. This significantly reduces development time and gets new features and products into the hands of customers much faster. This agility is critical in today’s fast-paced financial market, where customer needs and expectations constantly evolve.

• Reduced development time and costs: Banks can potentially reduce their development and maintenance costs for new products and features by leveraging third-party services.

• Increased scalability and flexibility: Banks favor partnerships for their BaaP initiatives due to the flexibility they offer. Unlike acquisitions or investments, partnerships require minimal integration and allow banks to explore new financial territory without straying too far from their core business. This adaptability makes partnerships a natural fit for banks that expand their scope toward building platform strategies.

How cloud-native technology empowers banking-as-a-platform

Traditional banking systems were built for a different era where agility and innovation weren’t as crucial for success. Cloud-native technology disrupts this status quo by offering a new way to build and deploy banking solutions, providing:

• APIs for seamless integration: BaaP leverages APIs for smooth integration of systems and third-party developers to build on top of the bank’s infrastructure. These APIs act as messengers, allowing BaaP to communicate with other financial services, fintech apps, and third-party data sources. This collaborative ecosystem allows BaaP to leverage the strengths of various third-party applications and offer a wider range of innovative financial products and services. 

• Microservices for flexibility and interoperability: Traditional monolithic financial systems are complex and challenging to change. Cloud-native BaaP leverages microservices architectures where the applications are composed of small, independent services that communicate with each other through APIs. Each component represents a particular banking operation, such as bank transfers, and they can communicate. This modular approach offers incredible flexibility. Banks can easily add, remove, or update individual microservices without impacting the entire system. This promotes faster development cycles and easier integration with new technologies.
• Containerization to accelerate application development: In the context of BaaP, containerization allows developers to build and test new features or functionalities in isolation. This streamlines development and deployment by ensuring the application runs consistently across different environments, significantly reducing the time to market for innovative financial products and services.

What the future holds for banking-as-a-platform

BaaP is a relatively new concept that is revolutionizing the financial service industry with exciting possibilities. 75% of customers are envisioning the future bank as a one-stop shop for all their financial needs—an evolution beyond convenience. We can expect a rise in sustainable financial options, reflecting a growing focus on responsible investing. According to SDK finance, the Neobanking market will grow to $394 billion in value by 2026, at a CAGR of 46.5% in the coming years. This is evident as industry leaders like Revolut have since tapped into this platform model, providing all-in-one banking services. 

Another case study is Temenos, which offers banking services across retail, corporate, treasury, wealth, and payments. Banks and financial institutions are embracing platform engineering concepts, creating composable and API-driven platforms that deliver a seamless user experience and robust transaction security.

Platform providers like Mia-FinTech have the potential to speed up this process by offering a cloud-native software suite that enables financial institutions to develop and create new digital services in a fast and scalable way, evolving towards innovative business models like BaaP in full compliance with applicable laws and regulations.

Wrapping up

The rise of platform banking is transforming the financial industry by enabling a powerful network of connected financial services. The platform approach presents a significant opportunity for financial institutions. By adopting BaaP, institutions can unlock new innovative services and revenue streams, optimize operating costs, and deliver a wider range of products and services to the bank’s customers. Don’t get left behind. Become a leader in the digital age by adopting BaaP; you can download the Mia-FinTech legacy modernization whitepaper to learn more.