One of our informational materials was dedicated to the difference between classic banks and payment systems EMI and PSP. After talking about the differences, we can’t avoid mentioning the interaction. That’s why our new material will be devoted to the relationship between banks and fintech companies.
Despite active development and improvement of fintech, today even the biggest optimist would not talk about full replacement of banks with payment services. First of all, because the opportunities offered by a banking license are much broader than those offered by a license for FinTech companies. Accordingly, the requirements for a banking license are much higher.
Banks, unlike fintech companies, have:
– The already mentioned license with much broader capabilities, allowing for transactions between payment systems participants;
– Much more developed infrastructure;
– Wide variety of settlement mechanisms, access to direct connection to clearing and payment systems;
– The right to provide a full range of services: payment, investment, credit. Whereas payment systems cannot accept deposits and provide credit services.
Moreover, payment systems not only cannot compete with banks for the above reasons but also depend on them:
– Fintech companies’ customer funds are held by banks;
– Correspondent banks must be involved to make payments;
– Cash transactions.
The broad opportunities and advantages of banks, meanwhile, should not be taken as a hint at the “limitedness” of fintech. On the contrary, some of the advantages of banks, when viewed from a different angle, are transformed into disadvantages, thus adding to the advantages of fintech. FinTech, unlike banks, has such important advantages:
– Regulatory requirements for FinTech are simplified compared to those for banks;
– Low staffing costs allow for significant reductions in operating expenses;
– All processes are automated;
– All services are available online;
– Uncomplicated business infrastructure and process automation, making the entire infrastructure much more flexible.
Bank-as-a-Service
EMI and PSP payment systems remain “tied” to banks, and the very existence of fintech without banks is impossible. Binding “bank←→ fintech” has a form of dependence for payment systems, but it works in a reverse direction, stimulating banks to develop and expand services.
Banks look for – and find! – An opportunity not to oppose fintech companies, but to benefit from working with them. Banks benefit from giving fintech companies access to their ecosystem. It became possible to use banks’ developed and complex infrastructure as a service. This is how the concept of BaaS: Bank-as-a-Service, Bank-as-a-Service, came about.
In simple terms, BaaS for fintech is access to banking services through a single connection. A fintech company simply connects to a bank and gets the ability to open accounts for customers and conduct transactions. And to do this, the payment system does not need to get its access to, say, SWIFT, build its infrastructure, and even get a separate license.
One cannot say that BaaS is an ideal form of cooperation with banks for fintech companies. Its disadvantages include dependence on one service provider, lack of customization, and decreasing benefits for fintech with the increasing number of clients.
There are also advantages, such as quick access to a wide range of functionalities and predictable costs (monthly fees for BaaS providers are fixed).
But the overall outlook for fintech companies is quite positive. Banks are actively turning into marketplaces, and soon, we will witness both a complete renovation of the banking system and the emergence of new forms of interaction between “new banks” and fintech. Cooperation instead of competition is the motto under which the financial services sector will develop.