Introducing BaaS, a Modern Way to Enter the Digital World

Banking-as-a-service (BaaS) becomes a hot topic on how banks try to innovate into the digital world. Earlier this year, Standard Chartered Bank (Stanchart), through Nexus, pioneered this method through partnerships with Bukalapak and Sociolla. Nexus was developed by SC Ventures, a Stanchart investment company.

BaaS term is different from open banking or digital bank (neobank) which has commonly known. DailySocial interviewed some industry players regarding their respective differentiation.

Before BaaS, Indonesia had already been familiar with the concept of a financial product marketplace such as those implemented by CekAja and Cermati in its debut. The concept is similar to when accessing e-commerce pages, consumers can access various financial products from marketplace partners and make transactions.

"BaaS, open banking, and financial product marketplaces are different things, where BaaS can give providers the ability to build systems that will be owned by the provider itself, based on the infrastructure and expertise of the bank," CekAja's Director of Legal, Compliance, Governmental Relations and Human Capital, Marthina Natalyna said.

Meanwhile, Finantier's Co-Founder and CEO, Diego Rojas said that BaaS is different from other API concepts because it provides a licensed and regulated infrastructure for core banking services. Out of the box, almost all companies can now become fintech companies without going through the long process, thanks to the existence of open finance companies such as Finantier.

Finantier is a startup that provides an open finance ecosystem to support collaboration between various types of companies in providing financial products specifically designed for their consumers.

"Innovators must focus on the customer experience and on their core digital products, while the basic complex infrastructure and regulatory side are fully covered by BaaS," Rojas said.

Nexus Indonesia's Country Head, Hermawan Tjakradiwiria shared his views. Quoting KPMG, open banking generally refers to the ability of banking customers to authorize third parties to access their bank account data to collect account information or to initiate payments.

Meanwhile, Investopedia stated that access is done through the use of an application programming interface (API). On the other hand, neobank, according to the interpretation of Fintech magazine, is physical banking that offers a completely digital experience, such as a savings account or debit/credit card service.

"Sometimes these new banks provide services under their own banking license, but they can also take advantage of the BaaS solution as a client to act as a new bank."

He defines nexus as a BaaS which enables non-bank players to offer financial services to their customers by connecting directly to the bank system via an API. They can provide banking offerings on top of a bank regulated infrastructure. As a result, the platform can launch financial services in its ecosystem.

BaaS global trend

Source: Depositphotos.com

In 2018, regulators in European countries issued a Second Payment Services Directive (PSD2) which inspired the standardization of open banking in the United Kingdom to encourage synergies between banks and fintech instead of intensifying competition. The innovative era driven by API and the arrival of BaaS technology allows banks to invest sufficiently while providing better services for mobile-first consumers and remaining in the industry.

The BaaS initiative has been widely used in Europe, then expanded to other regions, such as the United States, Mexico, Brazil, Australia, Singapore, and Nigeria. In Germany, for instance, there is solarisBank that powers many neobanks in Europe. Then in the UK there are Bankable, Pi1, and Starling Bank, while in the United States they operate Green Dot and BBVA. The concept they offer is acquiring multiple partners to offer financial services.

solarisBank has collaborated with 70 companies and managed to acquire 400 thousand new users. One of the solutions offered, along with American Express, is the Splitpay feature to simplify the consumer check out process on an e-commerce platform in Germany with an installment option for several months.

solarisBank earns revenue from partners when they pay for the API services used to activate accounts and cards. The company also collects exchange fees for card transactions (interchange fees) and shares revenue with these partners. In addition, solarisBank can offer income sharing on credit interest with partners.

This condition, for Rojas, is a win-win solution for everyone because banks and financial institutions try to remain relevant to current conditions to reach new consumers. Financial services, which are at the forefront of the company's business, can still be adapted to certain segments in the market.

“In order to increase their income by allowing other players to take advantage of their services. Bring more AUM (Asset Under Management) and keep the bank relevant,” Rojas said .

"Some of these neobanks focus on very specific markets, such as millennials, with sustainable-oriented business, or even target specific geographic or social groups," he continued.

Indonesia's groundwork

In Indonesia, regulations related to open API are currently being prepared by Bank Indonesia. There is no final word yet when the central bank will officially release it. The Open API standard is an embodiment of Vision 2 and Vision 3 of the 2025 Indonesian Payment System Blueprint (BPSPI) to support the implementation of open banking in the payment transaction area in order to encourage digital transformation by banking, as well as interlink between banks and fintech.

Even though there is no standardization yet, Rojas believes that the central bank is taking the right steps to read global trends, learn the kind of mistakes and shortcomings in its application, then adjust it to the practice and guidelines in Indonesia. "There are benefits if you don't become the first player in this area because banks, businesses, and regulators can learn."

Moreover, the journey of the fintech in Southeast Asia is quite broad to grow in line with global trends. Creating opportunities for innovators to help banks developing services according to consumer needs. The first players started in Europe and the US, then entered Southeast Asia, slowly starting many financial institutions to transform digital and take approaches through BaaS.

Source: Standard Chartered

Tjakradiwiria expressed his gratitude for the support from regulators because Stanchart was able to bring Nexus and activate BaaS in Indonesia. He also ensured that Nexus would always comply with local regulations and be ready to implement them with partners.

"There is always room for growth and innovation in banking. We are confident that we are in a new era of finance, especially with the growing digital and mobile penetration in Indonesia."

Today, there are many digital companies with a user base looking to expand their capabilities and revenue streams by targeting specific issues experienced by users. This is where the Nexus comes in. Providing technology, financial institution support, risk, and compliance expertise will help partners to grow further and increase brand stickiness.

"Nexus will provide partner's users with access to financial services through a platform, which has become part of their daily lives, therefore, accessing banking services will be as easy and seamless as any other digital engagement in the partner's ecosystem."

He said, when consumers feel that financial services are easily accessible through the palms of their hands, that's a form of victory. Banking digitization embedded in financial services plays a very important role in improving access to finance for the underbanked and unbanked population.

He believes that Nexus can bring Stanchart into a new segment that has never been utilized before. Previously, Stanchart was attached to the perception of commercial banks as affluent middle to upper-class customers.

Nexus targets strategic partnerships with major ecosystem players on social media, ride-hailing, beauty, and others to formulate financial products through co-creation. Eventually, the financial products produced are in line with what consumers need. Therefore, Nexus did not all of a sudden offer the existing banking solutions presented by Stanchart.

"We are iterating product development, conducting research and testing to customers on a regular basis. In order to evaluate product readiness, we consider whether this product satisfies the user's needs and achieves our goal of increasing access to finance. We adapt it accordingly to solve our partners' problems."

Rojas expressed his optimism about the future of BaaS because it could spur innovation. The banking infrastructure will become a commodity, therefore,  many innovators can embed financial services into their products, providing a better end-to-end experience for consumers.

The financial product formulated by Nexus with Bukalapak and Sociolla is worth waiting for. It is to be released this year. "We are committed to launching commercially with the first 2 partners we announced," Hermawan concluded.

–Original article is in Indonesian, translated by Kristin SiagianHeader: Depositphotos.com