Digitalization in the banking industry is always a major requirement. To add to it, our new lifestyle which calls for increased virtual contact rather than physical presence has made this requirement a high priority. Similarly, although, banks have digitalized their payments and other transactions, fully digitalized banking services have become a necessity. And that is happening, thanks to Neobanks the 100% online banks which have no branches and is hosted completely on a cloud-based platform.

What makes Neobanks so special?

To bridge the gap set by the traditional banks with their limitations like legacy architecture, difficulty in accessibility, time consumption, overall customer experience etc., neobanks came into existence. Since then, neobanks have always seen a positive growth curve with their abilities like easy-to-use user interface, faster customer onboarding, funding and loan process, 24/7 support, etc. The super technology behind neobanks is BaaS or Banking-as-a-Service.

BaaS mainly takes care of ‘behind-the-scenes’ actions and responsibilities to ensure a strong front-end. BaaS ensures that the application’s front-end is dynamically scalable, consistent and efficient with respect to overall performance, 24/7 availability, enhanced security, etc. BaaS helps fintechs to connect with banking services using APIs therefore is less expensive.

How BaaS works?

As Skinner explains, BaaS platform mainly consists of 3 layers. The bottom layer is the traditional, licensed banks. The middleware is BaaS based on 40+ pre-build APIs which means banks need not worry about creating a new API. The top layer is an ecosystem of full-fledged fintech start-ups.

With BaaS, banks can have multiple API’s and other fintech companies or individuals can create a solution using those API’s. With the API’s in control of banks, the solutions that are created will help promote the bank, services their customers in a smarter way.

This means that BaaS acts as a component which takes care of the end-to-end banking process and not just the customer services. This leads to not just better customer interaction but also reduction in total human efforts in the banking industry.

Neobanks and BaaS

BaaS is an important component in open banking and as neobanks work using open banking concept, BaaS becomes an essential part of neobanks as well. The fundamental advantage of neobank is that it is wholly built and managed over the cloud and this can happen with BaaS in the backend. Neobanks leverage BaaS because it reduces the development and maintenance costs to a major extent as there is no requirement to build the software from scratch. BaaS helps neobanks launch faster and gain profits in a shorter span of time and all these with less cost. Also, BaaS helps large banks migrate their legacy-based system, which holds plenty of unstructured data into a cloud-based platform hosted by the third-party vendors.

Take the example of Judo Bank, Australia’s first SME focused challenger bank who opted for cloud-based core banking platform along with providing a digital banking experience to their customers. Aspire Systems provided the technical assistance like implementing Temenos Transact for their core development, DevOps methodology for continuous delivery, strong front-end architecture to enhance customer relationship using Temenos Infinity, etc. With such strong and legacy-free backend, Judo Bank was able to attain their license on time and digitalize in and out.

However, there are certain restrictions in implementing BaaS in neobanks. Major ones are – Regulatory compliance and Cyber-crime.
Most banks prefer hosting their services on a public cloud. However, when we helped a prominent bank in KSA to set up their neobank, they wanted to host their services in a private cloud. This is because the central bank mandates the data to reside within the country.

Cyber-crime is another main issue because of the increased number of gateways that offer additional online services thereby, exposing themselves to the risks. Ensuring customer’s data security becomes a challenge as this aspect is directly involved with the financial institution’s growth and customer’s trust. This calls for stronger cyber-security with multi-layered encryption and a strong firewall.

To overcome the above challenges of cybersecurity and regulatory compliance, most fintechs are working towards building a better security system and eliminating other limitations. This is because implementing BaaS proves beneficial for both banks and vendors for obvious reasons. Also, it ensures that the customer relationship with the bank is long-lasting.

A Takeaway

Aspire Systems with more than a decade of technical expertise is always been on the lookout for trending technologies and its implementation. With diverse skill-sets and substantial attention towards growth, we ensure that your technical architecture is always on the trending bar. On the same note, here is our successful take on Neobanks: The Secret Sauce of Neobank Success – An Explanation and Exploration