Difficult times for banks. The existing business models are becoming less and less profitable and the new business models are either specified by the regulator or demanded by the customers. Gone are the days when banks could be successful as universal banks. A special business model has developed not least based on regulatory requirements that could again become a source of income for banks, which at the same time establishes them as an important pillar of society.
This applies to the provision of infrastructure and services not only to private customers but also to Fintechs, banks and specialist institutions. This sounds little disruptive at first, but on closer inspection it is. But let’s look at the development historically:
The bank outsources some of its processes
Banks have initially begun to outsource their own processes to third parties. This concerned individual processes such as “onboarding of employees”, PC provisioning, programming services or other procurement services. So, while at the beginning banks were still outsourcing services oneself, the question soon arose as to whether a bank does not want to be active as an outsourcing provider itself. And they learned in the years before how to manage outsourcers.
The problem, however, was that banks are IT-heavy and have to use their core banking system to provide IT services. It turned out that existing core banking systems were rarely able to offer external interfaces or, for example, were not suitable for multiple clients. It was therefore good that the EU adopted the so-called PSD2 Directive, which obliges banks to give external service providers access to their systems.
The bank as an outsourcing platform
Within the framework of the revised Payment Services Directive (PSD2) of the European Banking Authority, certified third party service providers were enabled to request account information and trigger payments upon customer consent. These services are provided via a dedicated Access-to-Account interface between third-party vendors and banks. API is the abbreviation for Application Programming Interface. Developers can access the functions of an application via an API interface. The API defines the correct way for a developer to write a program that requests services from a system (core banking system) or other application.
It is primarily through this standardisation and specifications that banks have recognised the significance of this development, namely that they can offer infrastructure and additional services as service-providers.
The bank as a Service-Provider
Third-parties no longer have to set-up their own (cost-intensive) banking-infrastructure, but they can rent or buy services from the service provider (i.e. the bank). The bank can achieve significantly higher margins for not only leasing-out infrastructure, i.e. for access to the platform for e.g. payment services, but also by offering third party providers banking services.
It should be noted here, that under MaRisk, however, that even if all banking related processes can be outsourced to a bank as service provider (= banking as a service), the decision-making authority must remain with the bank license holder.
Financial advantages for banks offering services to third parties are: Additional sources of income based on: 1. service fees, and 2. infrastructure rental/use and 3. possibly funding income (interest) and 4. possibly investment income. The cooperation agreement with the respective third-party determines which sources of income will be used in the individual case. The bank has the option of deciding which type of partnership to enter into, depending on the industry, business model and partner.
On the part of the service provider, consideration should be given to whether to set up its own company to take over service providing or whether servicing should be provided within existing organisational structures. From my point of view, it has more advantages to set-up an own company and to develop the servicing transparently with an own team and own culture and leadership.
Part 2 to follow.