Banking as a Service: How to unlock benefits valued at $5 million

One of the hallmarks of digital transformation is the importance of the "ecosystem economy," where companies are leaning on partners that offer complementary services instead of just trying to build everything themselves. It is smart both from an IT and a business perspective. You can see these types of symbiotic relationships emerging in the world of banking. It's best to pay attention, or you may go the way of the dodo.

One such relationship is between small- to mid-sized banks and retail brand partners looking to offer banking products—bank accounts or wallets, payments, and lending—to their customers. Instead of trying to take on the near-impossible task of developing new banking themselves, they are partnering with banks that offer embedded banking products. Their aim is to retain customers and increase their lifetime value.

For customers, this means that they no longer need to go directly to banks for every financial need. They can access financial products and services easily as they interact with businesses such as hotels, airlines, employers, or even grocery stores. 

For banks, this is an opportunity to extend the value of existing products—such as card services, payment services and —by making them available digitally to brand partners, and in turn to their customers in a B2B2C (business-to-business-to-customer) model. 

Collectively, this is what is known as Banking as a Service (BaaS).

To support this new business model, banks must take an API-first approach. With APIs, they can repackage the banking products they've already worked hard to build, using the systems they already have in place. With the right approach to APIs, banks of all sizes can find innovative new ways to participate in the ecosystem economy. 

When they are built and managed properly, APIs are easy for developers to use and plug into any application they are working on. They make the technical side of BaaS as simple and seamless as possible. They allow, say, an application on a brand partner's website to connect directly to your systems using information that passes back and forth using the API.

For small- to mid-size banks looking for innovative ways to expand their customer base, this presents a massive opportunity. If you can provide APIs based on banking products that are as good as big box banks, then you can compete on a level playing field with them.

And now is the right time to figure out your approach. The demand for BaaS solutions in the U.S. is expected to rise at an impressive CAGR of around 15% from $2.8 billion in 2021 to $12.2 billion by 2031.

However, to make it work and capture your share of that $12-billion payout, you will need to get both your business and IT strategy just right:

Given the importance of APIs in Banking as a Service, it’s critical that the APIs themselves are managed as products. This will require a full-lifecycle approach that covers creating, publishing, promoting, deploying, securing, monitoring and monetizing them. Throughout that lifecycle, you'll need to consider:

• How you will keep them secure: The security of your APIs is the number one concern. They have become popular attack vectors for hackers and other digital good-for-nothings. You’ll want a comprehensive set of security measures so you can track how your APIs are being used and by whom. 
• How you will monitor usage: Banks need to understand how their APIs are being used and by whom. It will help you make sure your APIs are performing as expected and allow you to fix them before BaaS brand partners have time to complain. 
• How you will collaborate with the developer community: As mentioned, one of the benefits of using APIs to develop BaaS offerings is that they should be easy for developers to use—"should" being the operative over. To do it right, you need an API portal where developers can discover your APIs, read documentation to understand how to use them, talk to other developers who are also using the API and provide helpful feedback so you can constantly improve.
• How will potential retail partners find them: "Build it and they will come" is not a sound API strategy.  Instead, develop an API marketplace where potential partners can find and learn about your BaaS APIs. Like in any marketplace, how you present your product will influence the perceived value, quality, security and reliability of your APIs and banking products. 

It is difficult to do all of this with a homegrown API management solution. Even the most capable IT teams could use a helping hand. This is where an API management platform can take your BaaS approach from good (and a bit risky) to great (and risk-free).

With an easy-to-use, unified solution for managing APIs that handles all of this—from creation to value—you’ll be able to deliver and adapt faster. Simply put, Banking-as-a-Service requires the right approach to your APIs, and the right approach to your APIs requires an API management platform that reduces risk, increases adoption and accelerates time to value. 

We have developed a framework (based on industry research, customer reference, and best practices) to evaluate the potential financial benefits of using an API management platform to build and manage a BaaS offering. According to customers, an API platform helps overcome complex challenges, streamlines development and reduces time to market advantages over alternative (i.e. homegrown) approaches. 

Below, we outline the potential financial benefits that a bank can expect if they use an API management platform for their BaaS initiatives. We have forecast benefits based on three different bank sizes.

There's lots of money (not to mention headaches and heartaches) to be saved by using an API management platform for your BaaS program. But when you're looking for the right solution, it can be overwhelming to understand what features matter the most. 

Here are the core components you should look for in an API management platform: