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Banking as a Service: Do bricks and mortar matter anymore?

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In a digitally driven world, banks need to adapt to new realities. Impressive head offices and branches are less important, and customers are looking for more convenient solutions, powered by safe and secure technologies and, increasingly, embedded with their favourite brands. So what does that mean for the business and what should risk managers keep an eye on? Peter Rossiter, CEO, Starling International, explores.

Do you remember when the image of a bank meant a colonnaded edifice, a shiny tower or even images of Mr Dawes Sr and Mr Dawes Jr looking after Michael’s tuppence in the Fidelity Fiduciary Bank favoured in Mary Poppins? Bricks and mortar generate trust, right?

No, I thought not, that’s not how we assess the safety and security of our money anymore. Shiny towers are expensive, as are the complex data centres and bureaucracies inside. It’s no wonder shareholders are asking why they should tolerate high cost-income ratios and low returns on their equity.

Starling Bank set out to change all that. Licensed in 2017 in the UK with an ultra-modern technology platform and an ethos to serve retail and SME customers digitally, efficiently and above all, responsibly. With multiple awards to its name, including Best British Bank for the last four years running, we are now ready to help others offer the financial services of the future.

Let me explain that a bit more. The banking market is clearly evolving away from the branch model, based on often inflexible technology, to a digital first model that engages with the customer to make managing their money easier and less expensive. The revolution that we are seeing is based on vastly more agile technology, continued improvements in bank governance and regulation, and a purpose or mission that is truly customer centric. I liken this to a three-legged stool – the technology, the governance, and the driving purpose to serve customers better, all coming together to deliver responsible and resilient banking services.

I had thought you needed to provide all three legs of the stool to be successful. But this world is also changing – there are now more strategic choices. Open Banking and the evolution of all kinds of fintech mean that financial services can be delivered through a plethora of means. However, the foundations are the same – fit for purpose technology to provide resilience, solid governance to provide safety and security, and a passion to provide a value-for-money customer experience.

So, imagine a world where your trusted consumer brand can provide the same or better service than your traditional bank. As long as you know your money is safe, should you care if the bank behind the scenes has a shiny tower? No, you want to know that you’re getting the best payment services, the most competitive foreign exchange rates, or the most relevant digital experience.

That time has now come. Banking as a Service is a means to embed regulated banking products into everyday customer journeys. Non-banks can extend the use of their brand to banking services – without the responsibilities or the overheads of being a bank. They can source bundled or unbundled banking services from a licensed banking partner and offer them as their own, combine them with other services and, frankly, create opportunities that have not yet even been imagined.

The Banking as a Service market is growing in Europe, some estimate 25% annually. There’s a natural curiosity about it, not least from corporates who have had their own banks but for various reasons, find them expensive, inefficient, and challenging to run.

Just think what you could do if you could easily integrate the technology, coupled with regulated banking services, into your customer relationships, and pay only for what’s used.

What new risk management challenges does this raise for the bank providing the services behind the scenes?

Firstly, the relationship between the bank and the end customer is a little different. The bank remains responsible for all regulatory matters relating to the customer, but in a B2B2C model, the customer relationship is shared with the branded corporate. The bank must still manage itself in accordance with regulatory requirements and its risk management frameworks must be fully fit for purpose. It is critically important that the bank and the corporate are aligned on their respective responsibilities and that the model is well documented and understood in all risk areas, with perhaps a specific emphasis on conduct risk and customer treatment processes.

Secondly, the related technology should be easy for a corporate to integrate in a safe and secure manner, with customer data protected, consents and authentications robustly controlled and the platform able to operate in a resilient manner. The bank not only needs to ensure that the end customer is satisfied with the user experience, but also that the corporate is satisfied with this too.

Thirdly, the bank and the corporate should be comfortable with each other’s ethos and values – the bank is providing the services to the corporate’s customers, and both need to be satisfied that their respective values are sufficiently aligned.

This is a brief overview of an evolving and interesting trend. Whilst in my view the benefits of open banking have not yet been fully realised, banking as a service opens up many additional opportunities for corporate brands to be the face of banking in the future. Maybe it’s a little ironic that the banks themselves could become invisible after all these years – what would Mr Dawes say?

Discuss further with Peter Rossiter at RiskMinds International >

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