Welcome to Banking-as-a-Service

10th October 2018

by:

I’d like to make an important announcement. I am announcing the death of transaction banking. To those of you who are transaction bankers, I offer my sympathy.

But this is also a time of celebration, a time to celebrate a new age of banking – the age of the API – the age of Banking-as-a-Service.

Think of it a bit like The Doctor in Doctor Who being regenerated as the first female Time Lord: it’s still all about banking - or in The Doctor’s case, intergalactic time travel - only now a traditional paradigm has been recast and unbundled to reflect advances in technology, culture, demand and practice.

Let me walk you through the cause of death.

RIP Transaction Banking

Transaction Banking covers the day-to-day transaction needs and operations of business, corporate and institutional customers. It is a neglected and misunderstood side of banking that has lacked investment in terms of technology and talent. I speak from experience – I headed ABN Amro’s Global Transaction Banking across EMEA. I have served the largest companies in the world - and sold Cash Management Services to the most complex companies across the globe.

Transaction Banking is also a technology business – connecting the banks, governments and companies to payment routing technology that uses intelligence to net and pool funds before onward transmission to the Automated Clearing Houses, or ACHs, of the world.

Let’s tear down this statement about Transaction Banking and look at it in a new way. Let’s look at this through the eyes of 2020 tech.

In this new world:

  • ‘Connecting’ translates to API’s (at their simplest APIs represent a kind of a language that lets one product or service exchange data with another)
  • ‘Payment Routing’ becomes software - and, as we know, “software is eating the world”
  • ‘Intelligence’ now means Machine Learning, or ML, and Artificial Intelligence, or AI
  • And ACH is now widening to cover real-time payments and peer-to peer as well as Blockchain

Let’s take this a step at a time:

The API Economy

I am arguing that the API Economy is far more important and relevant than both PSD2 and Open Banking. The true API economy does not need legislation for its survival or existence. The API revolution is happening in every other industry – it does not need to be legislated to transform banking.

For example, Stripe has transformed Acquiring while Twilio is doing the same for messaging. And Big Tech have also made their platforms accessible as components and as an API. Amazon Web Services (AWS) is now the way to procure data centre services – gone are the days of hammering out a contract with Electronic Data Systems (EDS) for a data centre. It’s happening at every level. If you travel by Uber, it’s because you chose to make your own location data open through your phone.

The underlying theme of this kind of disruption is the unbundling of supply and service. Banking has come late to the unbundling revolution. But now, the sector is ripe for it - for unbundling, or disaggregation - and ripe for its own Software-as-a-Service transformation that will allow customers to pick and choose and pay for applications as they use them.

Software-as-a-Service (SaaS) businesses delivered by APIs have a low-touch sales model. These companies don’t sell; buyers help themselves. Low-touch sales combined with recurring revenues and lack of customer concentration are the three hallmarks of a SaaS business. In many cases these businesses are just better in all senses.

But combining these three essential ingredients on their own will not be enough. The winners in this field are likely to be nimble specialists capable of creating plug-in-and-play APIs to allow anything to be processed anywhere, rather than the large - slow - generalists of the past.

Starling is well-placed in this regard. We have built Starling with a set of public APIs that are freely available for anyone to use through our developer portal. These APIs range from basic read-only information up to instructing payments via the API, or even creating an account via the API. And we’ve made it simple: Starling’s APIs can be implemented with just a few lines of code.

(In our developer portal, potential partners can find our API documentation and can create a developer account and test their application in our Sandbox before requesting access to the public API.)

Moving on, to Payment Routing – yes payment routing. Imagine what ML and AI could do to revolutionise this function. From the days when it was a simple question of ‘high value or urgency’, we’re moving to a heuristic analysis. Machine learning is just around the corner.

As an aside, Starling was recently selected as one of only 10 companies in the world - and the only one from the UK - to join Google’s 2018 Launchpad Studio. The prestigious accelerator programme was inaugurated by Google last year and aims to work with established startups to apply machine learning to their business.

We’re now working with Google and Alphabet product teams and experts to explore how machine learning can be utilized to improve financial services, more specifically to turn data into insights that will help consumers make better and more informed financial decisions.

When it comes to access to payment clearing houses – whether ACHs, fast or slow, Faster Payments or not, or a payment system based on Blockchain, innovation is taking place at all levels.

But if transaction banking is dead, what comes next? Banking-as-a-Service and its little sister Payments-as-a-Service. That’s what Chris Skinner, the prescient author and commentator, has been talking about for many years. Well, now this world is finally upon us.

So what is the Big Vision?

Anne  Boden

Open Banking in Action

Banking-as-a-Service is not the same as the Marketplace model. The Marketplace is where customers of whatever size or segment select alternative third party products - insurance, mortgages or loans - displayed side by side and fully integrated by APIs.

Starling’s pioneering Banking-as-a-Service offer represents the next step. It enables businesses – including banks and fintechs, as well as retailers, and brands - to develop and scale new customised products, such as savings or current accounts and debit cards, quickly and efficiently without the need for long development lead-times and complex legal arrangements. They can pick and choose individual components, or product features, from Starling. And because they are using Starling’s banking licence, they do not need to become a regulated entity – their customers will effectively be opening Starling accounts.

Starling’s first Banking-as-a-Service partnership is with Raisin UK, the online savings marketplace that allows customers to pick the best savings deals on the market to meet their individual needs. The relationship allows Raisin UK to use Starling’s APIs to open accounts for each customer, collect their deposits and place them at their expanding network of partner banks that participate in its marketplace.

Raisin UK is just the beginning. We are now opening up our technology to offer distinct Banking-as-a-Service propositions to financial service companies, corporates and governments in the UK and across Europe. We already have a strong pipeline of partners that are expected to join our Banking-as-a-Service ecosystem in the near future.

At the same time, our Payments Services business is growing. Starling Payment Services unites our banking licence, payments expertise and tech with our customers’ financial products. Using our APIs, customers are able to quickly integrate into UK and European payment schemes to access Faster Payments, direct access to Bacs and SEPA.

By opening up our APIs, Starling is part of a new movement in which different businesses can tailor their propositions to each customer base and put their customers at the centre of a wider financial ecosystem.

Starling’s Payment Services and Banking-as-a-Service clients include the French challenger bank Ditto and government departments such as the Department for Work and Pensions.

Starling is already supporting several fintech companies and is working with Instarem, Vitesse, Incuto and AccessPay. It also has a number of strategic partnerships with companies such as Vocalink, CurrencyCloud, Form3, Railsbank and Bankable.

Banking-as-a-Service is the next significant step in our offering. It supports everything else we do - retail banking, business banking, payments services and our Marketplace. It shows that there’s more to Starling than meets the eye.

We’re proud to be one of the first real implementations of this platformification model for the banking industry. And we’re immensely proud too that the UK, already a world leader in fintech, is taking a lead on this front. That is no small achievement and it’s a reason for optimism as banking is transformed.

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Starling for Business stories: Ash Phillips