Exploring the potential of unbundling banking services via API-enabled BaaS solutions

Banks in India have opened their application programming interfaces (APIs), allowing third parties to build on them, innovate and offer new products and services. The move has led to a transformation of the way financial products and services are created, distributed and accessed, while changing the core role played by each stakeholder in the open banking ecosystem. APIs have enabled the next phase of digitisation in banks and banking services, allowing these to be unbundled and made available via third parties as banking-as-a-service (BaaS).

Enabling both open banking and BaaS via APIs

The bank provided APIs enable both ‘open banking’ and BaaS — two terms which are often used interchangeably but are conceptually different. Open banking refers to making customer data that was traditionally only with banks, easily available and accessible via APIs to third parties, allowing easy credit decisioning, etc.

The aim of open banking is therefore to break down data silos and enable easy access to data stored by banks and other financial institutions. On the other hand, BaaS refers to utilising APIs to allow third parties to provide services that were traditionally provided by banks but can now be directly accessed by customers via third party products and are built on top of infrastructure regulated by banks.

Banks in India initially introduced APIs to improve their own internal processes and to streamline software development, while allowing integration of legacy systems with the cloud. Making these APIs available to select third party partners like vendors, service providers, suppliers, etc., then enabled them to build mobile banking applications, or integration of third party services like insurance/ mortgage. The same bank APIs are increasingly being made available to third parties now, allowing the unbundling of core, legacy banking services like opening account, fund transfers, deposits, lending, issuing, etc.

The impact of UPI on unbundled funds transfers

Internationally, open banking has evolved differently in different markets. In countries like the US, Japan and Singapore, this has been entirely market driven, while in the EU, Australia and Mexico,it is driven by regulatory action.

In China, on the other hand, it is consumer-enabled with a willingness and demand for new age financial services. India has adopted a hybrid approach, combining the regulatory and market-driven approaches to offer public digital infrastructure like UPI and DEPA, open banking enabled via regulation via the Account Aggregator framework, and open banking and BaaS led by private players via the bank provided APIs and resulting partnerships.

The potential of API-enabled unbundling is best demonstrated by UPI. Built as ‘public digital infrastructure’ on the IMPS rails, it allowed the unbundling of bank-based fund transfers via IMPS, allowing any third party to provide payments-as-a-service solutions to its customers. This revolutionised digital payments, allowing non-traditional players even if they were not ‘regulated entities’ authorised by the Reserve Bank of India (RBI) or other financial regulators to enter and innovate in this space, and provide payment services to customers.

The simplicity of the UPI facility, be it using a user’s mobile number as a payments address or the lack of KYC requirements to link accounts, supported its uptake by customers. UPI is currently seeing over 3.2 billion transactions after its launch in 2016. API-based BaaS solutions bring the same benefit that UPI has brought to the payments space, allowing any fintech company, corporate, tech company, the government, or any other non-traditional player to innovate and become an effective provider of financial services.

A new ecosystem of BaaS players

With the opening of banking APIs, thus a new ecosystem of players is being created that includes fintech companies, platform players, aggregators and other stakeholders that provide service to customers directly. Here, API aggregators and API stack players provide the infrastructure to enable partnerships, support related service providers like KYC and offer identity verification. These can take the form of neobanks and other financial services providers, banks leveraging fintech partnerships to launch digital banks, or merchants and platforms/aggregators adopting embedded finance.

The BaaS stack today broadly comprises three layers: (i) a layer of underlying essential APIs consisting of bank/NBFC provided APIs, essential financial APIs from NPCI, the card networks, etc., and other non-financial APIs from Meity, DGFT, NSDL, UIDAI, etc. for identity verification, etc., (ii) a stack of intermediaries and aggregators including API aggregators, account aggregators, DEPA and India Stack tech, KYC and other API based service providers, etc., and (iii) the end-consumer facing products/ services ranging from big tech provided services, fintech services, superapps, digital banks, neobanks, government/ corporate services, etc.

The new ecosystem further will result in a change in roles. For banks, their traditional role and function will evolve to focus on providing a regulated architecture and core systems and services on which new products/ services can be built, and to act as the primary custodian of data. Technology and infrastructure players will go on to act as intermediaries focussing on building and securing the necessary infrastructure. Meanwhile, third party partners will focus on the customer relationships, be it the customer experience, evolving customer needs or creating personalised products and services.

Catering to evolving customer needs via BaaS innovations

BaaS has had an unmistakable impact on the financial services landscape, and APIs are acting as a key gateway to enabling this innovation. BaaS offers financial service providers a promising opportunity to grow and meet evolving customer demands. Nurturing partnerships between banks and third parties, building the required infrastructure and resolving challenges that arise, whether technical, regulatory or otherwise will play essential roles in this process.

For banks, this not only ushers in a welcome change via a digital transformation, but will also allow them to tap into numerous new revenue streams that API-based innovations enable.