The true meaning of BaaS

Just spent a day chairing a payments stream at a conference. We talked about AI, biometrics, central bank digital currencies or CBDCs as everyone calls them, infrastructure, pipes, plumbing … you name it … but the bit that intrigued me was the views of Kristian Luoma from OP Bank, a member of the Nordic Finance Innovation Group.

We were talking about Apple ID and the possible threat this could bring to banking authentication if it were used more widely for payments. He was not worried.

If there are third parties who do authentication better than us, then let the customer use them.

We talked about all the new payments processors out there and he was not worried.

If there are third parties who do payments better than us, then let the customer use them.

We went to and fro over the fact that there are so many ways you can pay today, who can keep track of it all?

If there are third parties who do things better than us, then let the customer use them.

I was a bit dumb-founded and asked him: so what is the role of a bank if you’re letting all these third parties do everything.

Our role is trust, he said. Customers trust banks not to lose their money. If they use third parties to do things that relate to banking, that’s fine. But would they store their money with them? Would they trust them to not lose their money? There are key questions and people understand that banks won’t lose their money. Do they understand this with Revolut, Square or TransferWise? Do they understand this with Apple, Google and Samsung Pay?

There is a huge difference between making a single payment transaction and running a deposit account. A bank’s job is to allow customers to find what suits them and their lifestyle, and to work with those agents that make customers lives better. If a bank can do that, great. If a third party can do it better, that’s also great.

A bank has to learn that they no longer control the value chain but are just a part of it and to work within that part of the value chain where they can deliver the most value.

He didn’t say a lot of this but it’s my interpretation and extension on the idea that a bank is just a small part of a much larger ecosystem. The larger ecosystem could include making payments, offering credit, processing loans, underwriting insurances and delivering authentication and verification. There may be 100s of companies that do each of these things and maybe a bank’s role is to aggregate them and deliver them as a superb customer experience.

I’ve actually been saying this for years – it’s what Banking-as-a-Service (BaaS) – is all about but OP Bank’s Kristian is the first and only banking representative who has sat on a panel with me and articulated this the same way as I do. It’s only taken 12 years but hey, I’m patient.