According to Chase, four out of five banking customers prefer to manage their bank accounts digitally instead of in-person. Invariably, revenue growth with more traditional methods of banking (extensive in-person branch networks) are facing increasing pressure to compete in the age of Industry 4.0. However, there are options. For instance, banking as a service (BaaS) is not a new way to bank, but it is gaining traction. It’s based around a platform that allows traditional banks to build, sell and maintain customer-centric applications quickly and easily. This approach has led to increased competition with fintech companies offering similar services. In this post, we’ll explore why more banks are transitioning from legacy banking systems to BaaS and custom software development to remain competitive in this changing landscape.
Digital Transformation is Both an Opportunity and an Imperative
Research from Cornerstone Advisors found that only 19% of banks have achieved their digital transformation objectives. However, digital transformation is not just a buzzword. It’s a strategic imperative for organizations of every size and shape, from traditional banks to fintech.
Digital transformation is more than just about technology; it’s about changing how we do business, interact with customers, and even think about innovation.
For banks, digital transformation requires taking a step back and reevaluating their processes from top to bottom. It’s not enough to create new digital products or services— digital transformation means reimagining your entire organization to optimize processes to reduce costs while increasing productivity and customer satisfaction in the digital era.
Businesses Are Evolving, and the Banking World is Changing Too
The banking industry is ripe for change. Banks are facing increased competition from non-bank players, experiencing a shift in consumer expectations, and coming under pressure to provide better customer experiences.
The rise of fintech apps like Square, Venmo, and Monzo has changed the banking landscape forever. With their slick interfaces and friendly user experiences (UX), fintech companies offer services that compete directly with banks and sometimes even exceed them. Moreover, customers’ expectations are changing rapidly. Also, digital is becoming the default.
To stay relevant in today’s market, banks need to find new ways to grow their business beyond traditional banking services, such as loans or ATMs. This means that instead of sticking with what they know best—like traditional bank deposits—they’re looking outside their industry boundaries to keep up with customer demands while maintaining profitability over time (or at least not lose money).
In addition, as we noted earlier, concerning ATMs and branches, legacy systems have become increasingly difficult to maintain as technology evolves around them. If a bank wants any chance at staying competitive in this space—and staying relevant—it needs a strong foundation upon which it can build its future offerings: one built upon modern technologies like artificial intelligence (AI), cloud computing, big data analytics, BaaS, and custom software development via APIs.
APIs are a proven option for custom software development because they make it easy to integrate multiple systems and apps, which can be useful for banks interested in building more complex solutions.
Why Traditional Banks Are Transitioning to BaaS and Custom Software Development
Invariably, banks will face challenges as they try to innovate from legacy systems. They have a core competency in banking, but they also want to innovate in other areas, such as payments and lending. However, bank executives are wary of venturing outside their core competencies because they don’t want to take on risks or put their company’s reputation at stake.
BaaS allows banks to stay focused on what’s most important: providing customers with the best possible experience. With BaaS, banks can leverage the expertise of third-party providers while maintaining control over customer data security and compliance requirements. By partnering with an external development provider, risks are delegated in the contract and you don’t have to hire and manage staff in a Great Resignation culture. It allows banks to focus on what they do best while still getting new functionality into the hands of consumers quickly and easily—without taking unnecessary risks along the way.
Both B2B and B2C applications are essential to a successful BaaS solution. To meet the needs of commercial clients you need this in aggregate, not the traditional core provided platforms. A consumer app that allows customers to check their bank accounts, view their credit scores, or make mortgage payments is an excellent fit for a BaaS solution.
In addition, traditional banks can also benefit from offering business solutions on top of a BaaS platform. Banks can offer services such as accounting software or expense tools through their digital channels without building these solutions from scratch. They can also avoid vendor lock-in by using open standards instead of proprietary protocols for connecting with third parties. Many core providers can’t meet these requests for enhancements, so banks need a technology partner to build these integrations for them.
Banks outsourcing custom software development to experts can save money by not paying the overhead costs of hiring in-house employees, training, and maintaining a physical office space. The costs of developing custom software solutions like BaaS vary widely depending on the type of product and its purpose.
Still, outsourcing can be a cost-effective way for banks to create products tailored to their needs. As a result, outsourcing custom software development allows banks to focus on what they do best: managing assets and making loans.
Grow Revenue with BaaS and Custom Software Development
When you shift your business model from a bank to a BaaS, there are several ways that you can increase revenue.
- Sell new services: Offer new services to existing customers through the platform or create an entirely new product line. For example, if your bank already offers credit cards and loans, you could also provide a mortgage loan service.
- Sell existing services: This would work well for banks that offer multiple products but aren’t heavily focused on one particular function (like mortgages). By selling these existing services through the platform in addition to issuing them directly yourself, you’ll be able to expand revenue without having to hire more employees or set up additional infrastructure.
- Increase revenue by selling existing services across platforms: If your company provides multiple types of banking products but isn’t primarily focused on any one area (such as mortgages), this strategy can help increase overall profits by expanding into other channels while still using the same staff members and hardware/software resources.
Hence, banks can focus on their core business and what they do best: lending money and managing risk. This is because BaaS can provide an IT system, which allows the bank’s customers to manage their finances efficiently.
Also, BaaS and custom software development allow banks to focus on customer experience instead of worrying about how to keep up with technological advances or new regulations. Banks will have more time for strategic partnerships when they adopt BaaS because they won’t have many things that require extra management time.
BaaS can provide access to new data sources that weren’t previously available, such as credit histories from consumer reporting agencies, which helps them make more informed lending decisions.
Financial services companies stand to gain tremendously by using BaaS because it reduces overhead costs while increasing efficiency and making it easier than ever before to explore new opportunities in eCommerce like peer-to-peer payments/remittances (payments between two individuals), business lending with cryptocurrency support through cryptocurrency debit cards, and more.
The traditional banking industry is changing. Financial services companies are becoming more agile, and consumers are demanding more from their banks. As new technology continues to emerge, banks must adapt or risk losing market share. We believe that BaaS is the best way for banks to remain competitive in this rapidly changing environment.
Further, by outsourcing BaaS and custom software development, banks can hire experts who know how things work behind the scenes, allowing them to focus on what they do best – providing financial services while keeping their customers happy simultaneously.
Ready to take your technology to the next level? Contact the experts at Ascendle today.