Should Outsourcing Backend-as-a-Service (BaaS) still be considered?

Should Outsourcing Backend-as-a-Service (BaaS) still be considered?

In the May edition of an Executive Report, an article titled "Unlocking Value through Technology Optimization" delved into the question of whether it's more efficient for banks to outsource or foster the growth of Banking-as-a-Service (BaaS) in-house.

BNY Mellon, a leading player in the financial sector, is leveraging Artificial Intelligence (AI) and machine learning to enhance its BaaS platform. The bank aims to move payments faster and more seamlessly while increasing safety and the speed of executing controls and oversight. BNY Mellon processes payments on behalf of its bank customers through its own API stack and capabilities.

For customers with niche processing needs, BNY Mellon partners with fintechs whose APIs can provide custom workflows or user experiences. The bank serves as the motherboard of the system, maintaining control of the ledger and the operational and technical switch in the BaaS 2.0 model.

Carl Slabicki, executive platform owner of treasury services at BNY Mellon, emphasises the importance of providing a great user experience, 24/7 instant service, and robust features. The bank is enhancing its BaaS platform to offer additional financial services technology and capabilities.

When deciding between outsourcing BaaS or developing it in-house, experts suggest that banks consider several key factors. Cost analysis is crucial, evaluating the total cost of maintaining BaaS in-house versus outsourcing. Expertise and domain knowledge are also important, with outsourcing partners typically bringing advanced technology and experience.

Scalability and flexibility are key advantages of outsourcing, providing the ability to scale operations based on demand. However, control and compliance are essential for banks, and regulatory scrutiny might favour a more controlled approach, which involves building critical components internally or maintaining oversight mechanisms even when outsourcing parts of the service.

The ability of the outsourcing partner to leverage automation, AI, and digital monitoring tools can improve efficiency and reduce manual errors. However, a bank that wants to retain innovation leadership might prefer to develop proprietary technologies in-house.

The decision should align with the bank's long-term strategy. Outsourcing can provide cost efficiency and operational focus, allowing banks to concentrate on core competencies. Conversely, a controlled in-house approach may support a differentiated customer experience or unique service models.

A more controlled approach to BaaS typically means developing core or sensitive components in-house, using selective outsourcing for non-core functions, implementing automation and AI tools internally, maintaining internal risk management and compliance teams, and continually assessing third-party risks.

First International Bank & Trust (FIBT) based in Watford City, N.D., has built a BaaS platform in-house, Kavinu, and is inviting fintechs to provide embedded financial services to more than two million consumers. FIBT's chief payments officer Trent Sorbe believes that the time is right for BaaS 2.0, a new model that allows banks to take back control and move beyond the challenges of BaaS 1.0.

Richard Rosenthal, a principal with Deloitte & Touche LLP, notes that more banks are considering building in-house BaaS capabilities, but it requires a significant investment of infrastructure, people, and commitment. He suggests that even banks outsourcing BaaS should aim to control the process more, by understanding customer balances, interacting directly with customers, and adopting a proactive approach to risk management and financial control.

Elizabeth Gujral, a director at Cornerstone Advisors, states that efficiency is no longer the only metric for BaaS, due to increased regulatory scrutiny, brand risk, and operational complexity. She recommends that banks consider whether their systems support real-time payments, open APIs, and partner integrations.

In conclusion, the decision between outsourcing and developing BaaS in-house depends on a bank's maturity, risk appetite, and strategic priorities. Banks must strike a balance between the benefits of outsourcing and the need for control, compliance, and innovation to optimise costs without sacrificing strategic priorities or security.

1. BNY Mellon, with its focus on AI and machine learning, is enhancing its in-house Banking-as-a-Service (BaaS) platform to offer a great user experience, 24/7 instant service, and robust features, while also partnering with fintechs for niche needs.
2. Experts advise banks to consider key factors when deciding between outsourcing BaaS or developing it in-house, including cost analysis, expertise, scalability, control, compliance, and the potential for innovation.
3. Richard Rosenthal from Deloitte & Touche LLP has noted the growing trend of banks building in-house BaaS capabilities, but this requires a significant investment and a proactive approach to risk management and financial control.

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