BaaS: Banking as a Service (Presentation)

I've just uploaded my latest presentation on Banking as a Service, which was presented for the first time in Bahrain this week. This is therefore, in effect, my fourth posting about why banking will be free, or razorblade margins anyway. 

You can read Parts One, Two and Three first if you want, but you should not need to as all we need, before we start, are a few definitions of terms.

BaaS is based upon Software as a Service, a method of taking complex applications and offering them as web services where you pay for what you use.  Salesforce.com and Netsuite are examples.  BaaS is just applying the same concept to banking services.

Widgets are parts of applications offered as simple pick up and drop code on the network.  The Google widgets on the top left of this frame are examples, as are the Plaxo, Twitter and LinkedIn widgets on the bottom left.  Programmers have developed these so that anyone can just lift them into their web pages if they want to, and have the right permissions.

That's all you need to know, if you didn't already, and you can now follow the presentation by clicking the arrows forward and backward on the bottom middle of the slides (thanks to SaaS Slideshare.net):

Alternatively, you can download the presentation if you want.

I've already nicknamed this presentation Banking on a Widget, and the slides link to all the relevant blog posts on the case studies of HSBC, BBVA, Social Lending and more. 

So what's the point?

The point is that BaaS allows banks to be decoupled into their constituent components and offered as widget-based functionality through the net.   It's radical but obvious, and applies to all aspects of retail, wholesale, investment and payments functionality.

I specifically outlined some basic attributes of BaaS in an earlier blog, but my thoughts have come on a little since as shown here.  For example, I've taken Ken Harvey's (CTSO, HSBC) comments about Banking on the Network, and used them to illustrate how BaaS has real power.

Ken makes the point that he can launch in any country and it is just the physical bits that cost: the buildings, offices, branches and advertising.  All the IT is free, because HSBC build it once and then deploy globally through the network so that it can be used by thousands of staff and customers in almost 200 countries. 

Note: one program build for thousands of users in hundreds of countries.

Once you have network enabled components, you can add any branch, product or even country onto the network for zero extra cost.

That's the power of BaaS.

BaaS means that any module, component or function of a bank can be application packaged and network enabled as a banking widget.  The balance statement widget; the payments transaction widget; the loan application widget; and so on.

BBVA realise this, as demonstrated by their Tu Cuentas service, but most banks do not get it which means that new players, such as PayPal, Zopa, SmartyPig, Wonga and more, could step in and deploy widgets for loans, savings and payments.

Using such widgets within BaaS allows a bank or new entrant to gain customers with no extra work as, once built and deployed, there is no extra cost for more on the network.  This is clearly demonstrated by Slides 4 and 5 which itemise illustrative costs for running my own business - the Financial Services Club.

Ten years ago, the Club would have cost around $800k in mailing, printing and telephone costs.  Of this, about $150k is the cost of physical meetings.  

Today, the only costs are for those physical meetings. 

The digital network - this blog, emailing, website operation etc - is near enough free from a costing perspective, apart for our own time and effort, as Typepad, Facebook and more create zero cost operations. 

This is the challenge for banks.  A decade ago, 70% of costs in materials that are now free would have been a big barrier to entry.  Today, the are not.

That's what Ken Harvey (HSBC) makes clear.  HSBC can enter any country with a mortgage, credit card or new branches, and the only costs are above-the-line marketing (that could even be free on YouTube) and physical infrastructures such as buildings.  The rest is on the network.

And it's not limited to retail banking either, as the new European equities exchanges are demonstrating.  Chi-X, Turquoise, BATS Trading, NASDAQ OMX and more are all launching radical new trading systems using leading-edge technologies at a tenth or more of the cost of the traditional exchanges.

They also have a tenth or less of the staff and overall, this is why these new trading venues can charge 10 basis points per side to clear and execute trades in under 2 milliseconds compared to seven times the cost and many times the time taken by the incumbents.

Any area of financial services you want to point to, I could show you new entrants and innovative incumbents changing the model using the concepts of BaaS and the network.

Combining these thoughts, BaaS with banking widgets delivers:

1) the ability to grow without any additional costs - just add more traffic on the network;

2) componetise the bank into widgets that can be picked up and dropped by staff and customers as they feel;

3) the opportunity for staff and customers to create banking homepages that are completely personalised to them;

4) the integration of banking functionality from one bank with others, in a completely flexible aggregated manner;

5) future-proofing for the semantic relational networking of the next generation web; and

6) totally flexible, totally comprehensive, low cost, high tailorability for every part of the banking organisation.

That's pretty powerful and compelling, as the bottom-line is that anyone could now launch a widget for a banking app and make it available anywhere. 

The question will then be: which widgets do you trust, which raises the old nugget of banking regulation, licences and other barriers to entry.

Some things are much slower to change!

Further reading if you have time.

Five articles on social media and networks, and their impact on banking:
Banks ignore social media at their peril
Social networks don't need banks, they need friends
Social finance is right here, right now
Social money – what’s all that about?
Mobile social money, the final frontier?

A few articles on semantic web and the future of banking:
Internet Banking 2010 and Beyond
Technology is key for banking in 2009
The next boom starts in 2014

A few books by Chris Skinner (that's me, in case you didn't know) and friends:
The Future of Banking In a Globalised World
The Future of Investing in Europe's Markets after MiFID
The Future of Finance after SEPA

Comments

[Simon Cavill]

Hi Chris,
Fascinating presentation, but I was surprised that there was no mention of mobile based banking/payments. If banks etc want to grow their currently tiny market share in Africa etc, then they can only do it by partnering with local mobile operators and their pre-pay payment networks to use their vendors to act as a cash based extension of their very small branch based banking/payments service.

Simon Cavill

[Chris Skinner]

Thanks for the comment Simon

I'm not ignoring mobile services but have a very strong view that, given time, most mobile apps will also be net-centric and web-enabled.

I'm alone on this one right now, as most emerging economies are hooked on SMS because they don't have smart phones.

But only five years ago or so, most folks didn't have smart phones and most emerging economies didn't have SMS.

So things move at a pace.

Therefore, BaaS and Widgets will address the mobile space as effectively as they do the rest today.

Or at least they will over time,

Chris

[FredericBaud]

Chris, I've had a lot of similar thoughts lately. I'd say that Kiva.org is probably the most advanced example of this new trend: they now offer a backbone where many MicroFinance Institutions can plug in no time. I don't know enough about all the precedents, but I'd bet they are currently having the fastest growth for a global banking network we've seen in history.

[Aditya Mishra]

Chris,

This is interesting. But I think this misses a few imp points. First, regulations play an important role in determining the plug and play bit. For eg see the Paypal situation in India. Second, local requirements may require different functionality than that given by a global system. This would mean either heavy customisation costs or a pot pouri of disparate systems. Third, the problems posed by the first two can be addressed by SOA and BPM based approaches. However, not many banks have that level of maturity. For example, Citibank's recent change of their core banking system. Even after the move, its about 30 years outdated when compared with other systems.
Given these, I think that it will take quite a bit of time before we see banks adopting BaaS. It also means that there would be opportunities for disruptive innovations.

Aditya