As an industry, we’ve invented an impressive repertoire of words to talk about what banks are doing with APIs. Banking-as-a-Service, open banking, Decentralized Banking, API Banking, Bank-as-a-Platform, and the list goes on. These various terms have been used so frequently and interchangeably that they have started to lose their meaning.
We decided it’s time to clarify what we really mean when we say Banking-as-a-Service and how this relates to open banking. The best way to do this is to drop the jargon, clearly define the terms and their relationships to each other, and look at what banks and fintechs are actually doing with APIs, rather than what they are calling it.
It’s easiest to view Banking-as-a-Service as a bank API strategy falling under the open banking umbrella. Generally, open banking refers to any initiative by a bank to open its APIs to third parties and give those third parties access to the bank, whether that be access to data or access to functionality.
This is not to be confused with the UK’s open banking initiative, a new regulation that came into force at the beginning of 2018.
Its official website defines the open banking initiative as “the secure way to give providers access to your financial information.” This definition of open banking centers around providing access to data, specifically, an individual consumer’s existing data. This leaves out access to functionality, a key part of open banking as it is defined in the US.
Access to data versus access to functionality
The simplest way to think about this broader definition of open banking is to divide it into two categories:
- Access to data
- Open banking initiative – UK
- PSD2 – EU
- Access to functionality
The open banking initiative in the UK and the second Payment Services Directory (PSD2) in the EU, described in this TransferWise article, provide access to data. Banking-as-a-Service provides access to functionality.
We can understand this difference by comparing an application that aggregates data from a consumer’s different accounts in one single location, like personal finance company Mint, to a solution that provides bank-like services outside of a bank-owned channel. See savings company Digit. Mint relies on access to bank data, creating new and valuable ways for consumers to visualize and understand that information. Digit relies on access to bank services and the ability to leverage a bank’s infrastructure to provide a service that the bank doesn’t offer to consumers outside of the bank’s existing footprint, all under its own brand. See the case study on how Digit leverages bank services through Open Platform here.
Banking-as-a-Service is just getting started
A key reason why definitions have become blurred, especially in the US, is that few companies provide Banking-as-a-Service in a meaningful way. The US environment still consists largely of closed environments or open environments that only offer access to data and bank-branded products. As reported in Innopay’s most recent open banking monitor, 74% of API functions offered through APIs are GET transactions for customer data.
Another reason is that the open banking initiative in the UK and PSD2 in the EU are both regulations that were developed to enhance transparency and give consumers ownership of their data. The US does not have specific regulations concerning open banking, as discussed in this recent BankingTech article. Instead, the definition of open banking in the US encompasses the need for banks to remain competitive and respond to consumer demands for a wide range of different integrated experiences. Experiences that make it simple and painless to accomplish a task, whether that be buying a home, getting paid, managing their finances or redeeming a voucher.
Giving third parties access to existing customers’ bank data is important to offer beautiful customer experiences, but providing third parties access to banking functionality through Banking-as-a-Service will create revolutionary customer experiences across industry verticals. Fintech consultancy 11:FS often says that open banking is only 1% complete. Banking-as-a-Service is the catalyst to increase that percentage and create more truly seamless and integrated customer experiences for the platform economy.