A short time ago, I hosted an interesting group for the Nordic Finance Innovation meetings. The meeting gathered several of the leading-edge Banking-as-a-Service (BaaS) companies that have launched in the last few years including Bud, Clearbank, Leveris, Saxo Bank and Solaris. Building on each others narrative it soon became clear that anyone could launch a full scale bank without a banking licence. I could launch a bank with a few APIs from Bud and Solaris. I could launch a full-scale investment and retail bank if I added in a few more from Saxo Bank. This is something else.
During the day, one of the speakers talked about the Lego Bank. The Lego Bank owns no pieces but assembles the pieces into different form factors. The constituent pieces are all the same. It is how you put the pieces together that makes the difference. Like Lego, you can build the pieces into a Castle, a House or a Winnebago. It’s all about how you click pieces together.
In the same way, I can take a range of APIs and build a Universal Bank, a Commercial Bank or a Retail Bank. It’s all about how I put the pieces together from the marketplace of apps, APIs and analytics out there.
I loved this metaphor for BaaS, as it resonates so neatly. As Marko, co-founder of Solaris said:
“Do what you do best, and link to the rest”
and this is what typifies the new world of BaaS. A bank can be launched in a day, updated three times a day and renewed once a month based upon a microservices architecture and using open sourced services from the marketplace of bank technologies.
This is radically different thinking to the incumbent institution.
An incumbent institution thinks it has to build and control everything. The new digital marketplace institutions build almost nothing. The new institutions curate and integrate everything fast and for free. This way they are hugely nimble, agile and free. The incumbent institutions try to manage everything, make sure it’s compliant and everything is inspected not just once, twice or three times but all the time. This way they are very slow, structured and expensive.
Could an incumbent institution become a Lego Bank? Hmmm. I don’t think so. It is almost like asking whether a drunk could become a sober preacher or a heroin addict a priest. It’s not gonna happen easily and, even if it did, there will always be occasions where the preacher and priest find it hard to resist falling back to the old way of doing things.
What’s the answer?
The answer is probably not far off what Leveris presented, which is a way in which to slowly migrate the bank to the new world whilst keeping its old world mentality. Leveris’s idea is that an incumbent bank can take any piece of the company and start to move it to a new API platform without having to cut out the heart of the bank. So I could take a payment process and open source it, whilst maintaining my old payment systems. I could take a credit rating process and open source it, whilst keeping my old credit systems up and running. When and only when I am happy with the new world, I can switch off the old world.
Maybe that is how an incumbent gets to be a Lego Bank. A Lego Bank runs alongside the Spaghetti Bank. The Spaghetti Bank keeps its proprietary control structures operating for as long as it wants but, eventually, finds itself running in a new open sourced structure based upon 100s of Lego pieces in the form of new APIs, apps and analytics.
Personally, I can’t wait for the Lego Bank and just worry that the Spaghetti Banks will never have the vision to become Lego Banks through lack of understanding, vision and leadership. Maybe I’m wrong but if they don’t start moving to an open sourced Lego structure soon, they never will.