Many banking and fintech executives don’t want to look uninformed or appear ignorant when terms like “BaaS”, “open banking” and “platform banking” are bandied around.
Cornerstone Advisors observed a wide variation in the use – and at times, misuse – of many banking and fintech concepts and terms. So, they produced “The Definitive Guide to Potentially Misunderstood Fintech Trends & Terms (and What They Mean to the Banking Industry)” to set the record straight and clarify a burgeoning number of banking and fintech terms that have emerged over the past few years.
In this article, we have chosen seven common terms from the above Nymbus-sponsored guide and presented their perspective and research, as well as our opinion on what these buzzwords mean to the industry.
BaaS allows non-banks (fintech companies) or non-financial firms to offer core financial services to their customers by integrating with banks via application programming interfaces (APIs). API is a software interface that facilitates communications between applications. In effect, fintechs and non-fintech businesses build financial services products leveraging the traditional banking infrastructure.
Only about 10% of financial institutions are currently pursuing a BaaS strategy. The majority are on the fence, according to the Cornerstone Advisors survey of 290 U.S.-based bank and credit union executives, Q3 2021.
“Banks and fintechs should think of BaaS as fintech banking. The difference between fintech banking and retail banking or commercial banking is that banks are providing banking services to retail or commercial (usually small business) customers indirectly through an intermediary (the fintech),” affirmed Cornerstone Advisors.
“Many banks think they lack the API development and technology integration capabilities required to be partner banks. They’re probably right, but there are a growing number of companies in the market that can help banks bridge this gap and become partner banks.”
Open banking gives consumers full control of their financial data, enabling them to access and share that data with third-party providers (TPPs) to get better and cheaper services than what they already have. Third-party access to financial data is done through APIs.
Open banking is designed to increase tailor-made products, reduce consumer costs, promote fintech product development and help banks partner with fintechs. It will also assist banks in improving their customer experience, accelerating lending and adding new revenue streams. With open banking, customers have the ability to access all bank accounts and various types of financial products and services in one place and at the moment they require it.
More than 60 countries have adopted open banking initiatives that are either regulatory-driven or market-led. Allied Market Research recently published a report, "Open Banking Market by Financial Services: Global Opportunity Analysis and Industry Forecast, 2019–2026." According to the report, the global open banking industry generated US $7.29 billion in 2018, and it is projected to reach $43.15 billion by 2026, witnessing a compounded annual growth rate (CAGR) of 24.4% from 2019 to 2026.
There are concerns around privacy breaches, data security and cybercrime. However, open banking is likely to alter the competitive landscape of the financial services industry and facilitate the introduction of innovative products and services.
Platform banking or platforms
Financial institutions have got a lending platform, a mobile banking platform, an online banking platform and other platforms. They think they know platforms. But not quite. “A platform is not just a technology construct but a business model,” remarked Cornerstone Advisors.
The book Platform Strategy defines a platform as a “Plug and play business model that allows multiple providers and consumers to connect, interact, and create and exchange value.”
“Becoming a platform is hard. Few banks have the strategic vision and the stomach to transform their business model,” said Cornerstone Advisors, pointing at Amazon as an example. It took Amazon about 20 years before it became a platform.
Because financial institutions don’t have the appetite for ground-breaking levels of change, they may not become platforms. So, they can collaborate with platforms. There are core integration platforms that allow financial firms to integrate with third-party systems, analytics platforms and marketplace platforms and that use data from multiple sources.
Buy now, pay later (BNPL)
BNPL is a type of instalments loan that enables customers to divide or spread their purchases into multiple equal payments over a specified period of time for either a fixed fee or a set interest rate, with the first payment due at checkout.
True to its name, BNPL allows customers to buy a product or service immediately and pay it off over time in weekly, bi-weekly or monthly instalments.
BNPL is becoming an increasingly popular alternative for payments at checkout for consumers, with continued traction expected in 2022. In 2021, PayPal’s BNPL witnessed a 400% year-on-year rise in volumes on Black Friday.
While BNPL is an important driver of retail sales, it is considered by many to be an indicator of instant gratification that encourages consumers to overextend themselves. There may be some truth to that claim, as Cornerstone Advisors research found that 31% of consumers who use BNPL say their financial health is “dire” or “struggling”, versus 20% of those who don’t use BPNL.
With the rise in consumer debt, BNPL has drawn scrutiny from global regulators who fear that consumers can accumulate excessive debt. However, as most of the concerns are related to consumer protection, it is unlikely that BNPL will face an outright ban. Better credit checks and judicious limits may be a preferred choice to rein in overspending.
“Credit invisibility is the paradoxical state in which consumers are unable to access mainstream credit products because they lack sufficient established records of having used such credit products in the past. When it comes to solving this paradox for consumers, banks’ apathy has left the door open to fintech companies and neobanks, which are introducing new credit builder products at a rapid clip,” commented Cornerstone Advisors.
According to research from the Consumer Financial Protection Bureau (CFPB), these consumers fall into two main groups: 1) The “credit invisible” consumers who do not have a credit history or record with any of the three nationwide consumer reporting agencies or national credit bureaus (Experian, Equifax and TransUnion), and 2) The “unscorable,” or consumers who have limited credit records with these credit bureaus, but the records are deemed unscorable because they consist of stale accounts (i.e., no recently reported activity) or contain too few accounts or accounts that are too new to be reliably scored. Experian research confirms that there are 28 million credit invisible consumers in the U.S., and an additional 21 million consumers have unscorable credit files.
Embedded finance is defined as the embedding of financial services within traditional, non-finance companies.
Embedded finance enables non-financial firms to integrate banking, insurance, lending, payment services and more into their apps and digital platform. This BaaS model allows the integration of financial services via APIs without the associated development and compliance costs.
In essence, non-financial brands can simply plug in the financial products and services they require and package them within their own environment and ecosystems. For example, an online retailer offering a range of lending or credit options to a customer at the point of purchase or sale, while continuing to be a retailer, is also now a fintech company or a digital financial services player.
A new study from Jupiter Research, Embedded Finance: Key Trends, Segment Opportunities & Market Forecasts 2021-2026, has found that the value of the embedded finance market will exceed $138 billion in 2026, from just $43 billion in 2021. It’s clear that the future of financial services has arrived.
Embedded finance presents a colossal opportunity for corporations, fintechs and banks, and they are getting ready to capitalize on a largely untapped market. In time, it will serve as a game-changer and have a profound impact on fintech and other industries.
A vast majority of banking and fintech professionals confuse financial health with financial literacy. “Financial health is behavioral, integrated and measurable, and will become the basis of competition in banking,” observed Cornerstone Advisors.
The new financial health concept isn’t rooted in literacy designed to educate consumers on how to improve their monetary lives. It is behaviour-driven, designed to leverage technology and data to influence the financial behaviours and decisions consumers make when they make them.
The new financial health doesn’t look at financial behaviour or education in isolation or a vacuum. “It integrates financial health with both physical and mental health, and moves the management of financial health out of the strict realm of financial institutions and providers,” explains Cornerstone Advisors.
“The new concept recognizes that there is a continuum of financial health - ranging from poor health to high performance - and that the components of financial health can be quantified (much like the scores we get on a wide range of physical health tests). And this new financial health concept applies to all consumers—not just the under-served ones.”
The new financial health is artificial intelligence (AI) and API-driven. The point of financial services differentiation is to help augment consumers’ measurable financial health.
We hope this article will aid financial services industry executives to not only comprehend what these key terms mean, but gain deeper insights into the impact these concepts could have on the financial ecosystem.
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