Banking as a Service - the future?

Financial Chat Fintech Chat
#1

Hi Community

I couldn’t find an existing thread to discuss Banking as a Service (BaaS) so here it is.

There are multiple relatively new players in this space that will offer you a white-label front-to-back bank - even with Business Process Outsourcing (BPO) on top.

What this means, and its a little tongue in cheek but actually fairly accurate, is you could go out and hire some Mad Men / an awesome digital agency / PR firm to market a brand and acquire customers and then just let Fidor (one of the providers) do everything else - they have people, processes, mobile app, infrastructure, APIs, they’ll do the AML/KYC for you and you borrow their banking license.

Starling offer this service and have Raisin on their platform. For those that don’t know Raisin, they are a Berlin based savings account marketplace. You sign-up once (only once) and then have access to heap of savings accounts and can switch between them. The savings accounts are offered by traditional third-party banks. The central Raisin account however is hosted by Starling - but you wouldn’t know that as customer - it’s Starling but with Raisin’s brand on top.

Why is this cool / interesting / clever? This means that Starling are now targeting institutions to join their platform. Aside from the fee that the institution pays Starling for the BaaS/Platform-as-a-Service, those institutions may already have hundreds of thousands of customers. So when they on-board an institution like Mettle (SME lender backed by RBS/Natwest) they acquire a heap of accounts and deposits at once. This is important because it puts cash on their balance sheet that then allows them to lend more - a path to profitability. Whats more it gives them a potentially enviable position at the heart of the payments architecture. The various institutions on Starling’s platform will be able to plug into each other more easily.

Other players are SolarisBank, Founder (by 11;FS) and even more established banks like ABN and BBVA.

What I find really interesting is that Chris Skinner was a big proponent that you don’t need to be a bank to pursue the marketplace banking business model. His argument was (in my words), “why get into all that banking license and regulatory hassle if you don’t have to”. " A FinTech can just use a legacy partner bank for that stuff" A fair argument. However, Monzo and Starling did believe they were better placed to build their own tech in-house. And now, we are in the extraordinary place where the in-house tech development effort has completely reversed Chris’ posited roles in the partnership. Mettle (owned by RBS/Natwest) is knocking on Starling’s door to use Starling as their banking partner - not RBS (as far as I know)!

I’d be really keen to hear others thoughts on this fascinating topic.

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#2

I think there is only so far you can get rebranding white label services.

Certainly, building our tech in house has allowed to us to move really quickly in adapting our product, building new features and integrating with other partners. Although building your own platform is a long term strategy it does give you independence and the ability to work with whoever you want to, you just need to build the integrations. If you are working on top of someone else’s stack then you may be limited to the partners they are able/willing to integrate with.

Not to say that white label services don’t have their place - certainly when we were starting out GPS/Wirecard allowed us to move super quickly and not worry about the complexities of Mastercard. Instead we worked on developing the product and growing our customer base. Of course, there was a point we started to outgrow the current set up and that’s when we moved more of the heavy lifting into our platform :blush:

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#3

As an end user it’s not very helpful when you have some issue to hear that it was a problem or a result of a decision from some third party partner/provider, so while such white label solutions can be good/necessary when starting out I don’t really see them as a long term solution to build a durable relationship with clients

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#4

It is not a particularly new idea. See for example
http://www.theaa.com/savings-accounts
which uses the Bank of Ireland’s licence. They’ve been around for ages.

Sainsburys Bank used to be Bank of Scotland, they were one of the first, set up in 1997. They now have their own banking licence.

#5

Is this anything different from M&S Bank using HSBC’s back end and front end in lots of places?

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#6

I think we can all recognise (and maybe applaud) Starling for their efforts in this regard

If was definitely something they had in their minds from the beginning and they’ve managed it well. It definitely suits them personality wise as a business to be scurrying around behind the scenes and out of the spotlight

Is it a fit for Monzo though? That’s I guess what is to be discussed here

I did always have a feeling that the current accounts at Starling mainly serve as a pipe cleaner to demonstrate their BaaS offerings and cannot shake that feeling

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#10

If that was the case why spend a ton of money on marketing to acquire mainstream customers when they already have 500k early adopters willing to try new features? It wasn’t as clear to me earlier, but it seems quite clear to me now that Starling branded products is their main focus.

I think BaaS is quite a niche product, but there’s certainly some demand for it. As mentioned M&S is operated by HSBC, I believe Ford Money runs on Barclays infrastructure etc.

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#11

Don’t want to get back into Starling debates as that’s been done to death

BaaS is where they make all their money though, so either they are subsidising the current accounts out of love or some grander purpose

I have a gut feel for the latter, but we disagree on that point

#12

They are looking at launching credit cards this summer, which will certainly add to their revenues.

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#13

That’s changed to end of the year now

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#14

I’ve said on this forum before, Starling really does seem to have found the holy grail of cross–subsidy, especially where foreign ATM use is concerned, and to a lesser extent, Post Office deposits.

The trade–off I think is that it feels like the current account is ‘done’ and they won’t bother developing more innovative features around budgeting and Committed Spending Pots. Monzo feels like it go on innovating for a long while yet.

A Starling credit card will be nice, especially if it is designed along the lines of the vertical debit card, but there’ll be almost nothing innovative about it. (Hoping to be proved wrong, and they deeply integrate it with the current account, a bit like Egg Money. Mind you, even that’s not innovative, as Egg did that twenty years ago!)

There is room for both Starling and Monzo – Tom Blom obviously saw that when he left Starling, which fits the description of a bank with a tech capability, as opposed to a tech company with a banking licence.

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