EXCLUSIVE: “Service with a Smile” – Martin Häring, Temenos and Tom Bentley, Vodeno in ‘Discover Money20/20’
An Uber driver wishes his fare goodnight, taps his smartphone, and finds first gear. Before he’s up to second, his app has passed his latest fee into a back-end bristling with financial plug-ins. By the time he’s cruising in fifth, his tax dues are recalculated, his monthly earnings forecast is adjusted, and the cash he’s setting aside for his children has found its way into his savings account.
Across town, a weary video editor presses send on a project, closes her laptop, and picks up her smartphone. It’s already shining with a notification: her invoice, automatically generated, has been sent. She scrolls down to see which bar her friends are at. Another ping: her work platform is running a discount with a popular ride-hailing firm. She’ll just need to pay using the platform’s in-house current account – which is perfect, because that’s where part of her day’s payment will shortly be split between pots labelled ‘savings’ and ‘nights out’.
Digital innovation is often presented to us in terms of a future full of seamless experiences such as these. But with the rise of so-called ‘embedded banking’ we might finally be on the cusp of finding out what that world will look like. It’s the next generation of banking – the new revolution in the fintech space.
The R-word was once a source of much hand-wringing for incumbent banks, who have spent a decade outmanoeuvred and outpaced by an emergent fintech vanguard. But this revolution’s different. Coalescing around the term banking-as-a-service (BaaS), it’s a trend that takes the best of the new fintech ecosystem, and fuses it with the one quality that has sustained the traditional bank up until now: their banking licence, and all the regulation and trust imbued with it.
This exciting financial fusion is exemplified by Vodeno, the cutting-edge, Cloud-native BaaS provider. Via a partnership with Aion Bank, which has a banking licence spanning the EU, Vodeno’s banking and non-banking customers not only have access to the usual array of retail and business banking solutions – they can also plug in to sophisticated, regulated banking services. It’s via brand partnerships with firms like Vodeno that our taxi driver and video editor will soon be able to access essential banking services through the platforms and brands they love – without ever touching an established bank. That doesn’t mean banks are set to fade into irrelevancy. On the contrary, banks reap the benefits of cheap access to many more customers. Research from the VC firm Andreessen ‘software is eating the world’ Horowitz has already found that early adopter banks enjoy up to three times above-market return on equity after embracing BaaS.
“We’re only just starting to dip our toe into the water of what this world could look like,” explains Vodeno’s CCO, Tom Bentley.
Martin Häring, chief marketing officer at composable banking provider Temenos, agrees we’re approaching an inflection point in a game-changing model. “I think BaaS is the mega-trend in the next decade to come,” he says, citing some gigantic figures.
“Cornerstone estimates $25billion in annual revenue by 2026; Bain is even going further, at $3.6trillion by 2030.”
Finastra recently estimated a $7trillion market by 2030, and, while the variance in valuations suggests a trend in its undefined infancy, it’s clear that institutions across the board ought to sit up and take notice. But first, what exactly sets banking-as-a-service apart?
“I think there’s a load of misinformation out there around banking-as-a-service, embedded finance – all these industry buzzwords,” says Bentley. “For Vodeno, which has a fully regulated banking licence as part of our unique makeup, it’s about providing what’s traditionally been only available through very large banking entities, through agency banking.”
Häring explains what that’s going to look like. “I compare BaaS to a utility model. When you plug your laptop into a socket, you don’t care where the energy is coming from. When you switch on your phone, you don’t care which carrier you’re served by. Using any kind of banking services in the future won’t be dependent on banks anymore. You just want them integrated into your daily workflow – made invisible.”
For years, Temenos has been helping players in the financial sector invisibly integrate with one another to compose new features and product lines. Through a Cloud-native, API-first platform, Temenos connects its marketplace of more than 100 fintechs with the world’s leading financial institutions. The firm’s client list is comprehensively spread: Temenos works with 41 of the world’s top 50 banks, and 3,000 banks overall in 150 countries. And as of September last year, Temenos enjoys a strategic partnership with Vodeno, and by extension Aion Bank, which is aimed at rolling out BaaS across Europe. So Temenos is now bringing its unmatched ‘composable banking’ architecture – represented on its website by thousands of Lego bricks – to the BaaS space. The Lego analogy helps us understand the implications of BaaS for institutions large and small.
“Large, tier one banks don’t want to replace any core functionality – they want to attach new functionality, or they want to leverage a functionality from someone else,” explains Häring. “They connect to BaaS services, through APIs, opening up their monolithic software and attaching whatever they want from the Lego bricks that we offer. On the other side, you have smaller banks, credit unions, community banks, tier three, tier four banks. They want to build the full bank out of Lego bricks, and they want to ramp that up in a matter of weeks.”
Bentley completely agrees. “It’s all about speed,” he says. “People want to rapidly adopt services. They know there are hard yards when it comes to getting a banking licence, so BaaS is the perfect solution for them. And then, of course, you have the non-banks,” continues Häring. “They are just integrating all of these services – with a regulated entity that they can use in the background. Because of that, BaaS is moving into e-commerce, retail, telco, travel – wherever, at a certain point, a banking service is needed, whether that’s onboarding, origination, party management, loans, or payments.”
So, banks get access to more customers, fintechs finally have a means to play in regulated banking spaces, and brands from Uber to Adidas can provide their communities with a far wider range of financial services.
“I think what’s really interesting is the creativity that those brands are going to bring,” adds Bentley. “I think we’re really about to test the boundaries of what those financial products can look like.”
A case in point is a recent project between Vodeno and Talenthouse, a platform that connects creative freelancers with work opportunities. With Vodeno’s help, Talenthouse launched its own money management platform in January, called ElloU. It currently offers fairly rudimentary payment services – a current account and a card – but with Aion’s banking licence squatting in the background, there’s no limit, in theory, to the list of financial and related products that ElloU could add.
“When you look at super-apps like WeChat, they take care of a person’s life – that’s their purpose,” says Häring. “And that’s how banks should think in the future: how can I take care of my customer’s whole life, from the morning when they wake up, through to the evening?”
The kind of product bundling needed to answer that will suit banks who’ve already unpicked their monolithic software to usher in partnered fintechs, which Häring sees as inevitable as banks move towards a platform-based model.
“Banks are thinking about their future business model,” he says. “Do they want to be an aggregator? Do they want to be a platform provider? Do they want to work with specialised BaaS providers?
“All of these business models have one thing in common: they’re platform-based. I think that trend is not reversible. BaaS is the dominant banking model, going forward. But you’ve got to be ready, from a technology point of view,” adds Bentley. “The clock is ticking.”
BaaS is generating a new wave of creativity that’s set to ride over the financial industry. But, unlike the rise of the fintechs, which seemed to shut out incumbents, this one carries them with it: a win for ambitious neobanks, a win for larger banks seeking new customers, and a win for our Uber driver as he connects to his next fare.