Banking as a Service (BaaS) is the new version of Banking using the Software as a Service (SaaS) business model.
You're probably all familiar with SaaS - it's basically paying for applications as you use them, rather than buying them - and a great example is Salesforce.com. I would also contend that Google's getting to be the biggest SaaS through its email, word processing and other apps. These services used to cost you a fortune, but are now free or near enough.
That's where banking is going.
Banking becomes plug and play apps you stitch together to suit your business or lifestyle.
There's no logical reason why Banking shouldn't be delivered as SaaS. In fact, it is already for some folks. For example, here's my banking with no bank involved:
Using prepaid cards, I can load up and get a MasterCard and just keep topping up without ever using a bank. Just look at Bank Freedom's website description:
"Enjoy the convenience of a prepaid card that acts just like a regular
credit card, with a Prepaid MasterCard® Card. Prepaid MasterCard cards
are paid in advance and are easily reloadable, which makes it a great
alternative to carrying cash. Offering you the same safety and security
as a regular MasterCard card, a Prepaid MasterCard card allows you to
make purchases or cash withdrawals at an ATM. Prepaid cards are a safe
and reliable alternative to traveler's cheques. When using a Prepaid
MasterCard card, purchases are automatically deducted directly from
your card balance, which can be easily topped up."
Equally, using Digital Wealth cards, I can get prepaid cards without limits. The card can be loaded using Wire Transfers, Western Union, MoneyGram, E-Gold, e-Bullion, Pecunix, WebMoney, and Liberty Reserve, and allows $3,000 per day or $90,000 per month to be withdrawn through 1.3 million ATMs worldwide.
Alternatively, I could use PayPal, Google Checkout, Bill-Me Later and other services for payments, although some of these need a bank account to open an account with them.
For my savings and investments, the best deal comes from sites like Zopa (I've written lots about this stuff already).
Today's borrowing and lending rates on Zopa are excellent: 12.8% for the highest risks on my lending, which I can insure, versus 8.7% interest for the lowest risk borrowers. The UK's best savings rates right now are 3.55% for example, and I can get a loan for 8.9% from Alliance & Leicester, but most are charging 11.9% or higher.
All in all, it would be an interesting experiment to load up on these services and try living on prepaid cards, revolving balances on PayPal and savings and borrowing through Zopa, just to see how long you could survive off the banking network.
I might try it some day.
I even think corporates could do this, and some do by running their own bank internally. However, I'm thinkg that, using BaaS, corporates would build a full financial service using providers such as First Data, the Barter Network, PayPal, Google Checkout and related services. I'm not sure they should do this, but it could be interesting to see how far you could push the boat.
What I'm really getting at here is that the old model of banking, where everything is packaged together around a deposit account with a cheque book, is bust.
That's why some banks are starting to white label and break apart their traditional services so that corporates can just buy-in the bits they like and want. That might be a SWIFT Gateway here, internet payment services there, international money transfers here, cheque processing there ... all bits of banking, all prices and packaged to plug and play as a service.
For corporates and consumers, there will also be niche operators who use BaaS to offer new banking models as integrators. These integrators bring the pieces together - Mint and Wesabe are already not far off the mark - and provide them in a far more competitively prices model than traditional banks.
This is the future bank, and old banks will need to reconsider their services to compete with this zero margin model.
Final thought: Banking as a Service. Think about it. Banking ... as a Service.
Now that would be nice, wouldn't it?
Note: I avoided any mention of sheep
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...