Banking-as-a-Service (BaaS) platforms are just a nudge away from morphing into full-fledged core banking systems. That is a big deal. The need to systematically overhaul core banking engines is now more compelling than ever. While moving to a cloud-native core banking environment is the obvious end-state, there are too few of them that you can buy off the shelf today — most of them still in the process of maturing architecturally and functionally. BaaS platforms are ideally poised to address this demand-supply gap.
The traditional construct of a bank-in-a-box core banking canvas no longer aligns with the need for agility and sustained innovation — both prerequisites for digital operating and service models. Transitioning to a nimble and responsive state requires breaking apart a monolith into distinct components, each carrying its autonomy to scale technically and innovate without disrupting the others. A classic example is to isolate DDA and payments — two components that are often tightly coupled, making it difficult to scale payments in the face of the explosive growth in digital payments. It is also critical to separate orchestrated processes from business products to ensure the reusability of components across business lines.
The brisk evolution of BaaS platforms in the last 3 years has made them functionally rich and versatile enough to deliver most of what one would call core banking components, all as distinct lego blocks. BaaS platforms today offer payments, cards, accounts, lending, onboarding, and even the pricing and ledgers underpinning them as independently scalable services designed and built on cloud — ticking all the checklists for a cloud-native core banking system practically. In addition, by their design and business model, BaaS platforms carry baked-in market integrations and partnerships, making them almost always ready to meet regulatory and localization demands — an aspect often the Achilles heel of off-the-shelf cloud-native core banking systems. With approx. $2 billion of VC/PE money pumped into the segment since 2018; capital has not been a constraint for BaaS companies with a good vision.
There are only a handful of off-the-shelf cloud-native core banking systems globally. Thought Machine, 10x, and Mambu lead the pack, followed by a host of relatively new platforms in the early stages of their growth. While Mambu has maintained its leadership position in the challenger banking, mid-size, greenfield, and SME segments, Thought Machine and 10x have grown rapidly across geographies, working with Tier1 banks in their transformation programs — an area that was once the bastion of legacy core banking solutions and in-house build initiatives. That said, scaling the core banking business across geographies and segments is mighty difficult. BaaS platforms are well-equipped to fill this gap.
As per MEDICI’s BaaS2.0 report, there are over 50 active BaaS platforms worldwide.
Some of them have a wide geographic presence with e-money/payments/remittance licenses in some markets, e.g., Nium and Railsbank. Their functional coverage spans DDA, loans, domestic & cross-border payments, cards, onboarding, and business banking. The platform of Solarisbank, one of the pioneers of the BaaS model, can support Alipay’s European operations on one side and Penta’s SME neobanking services on the other. Cross River Bank’s platform is the operating engine behind a host of FinTech services in the US, including prominent ones like Affirm, Coinbase, and Stripe. Zeta, born as a payments-as-a-service platform, has metamorphosed quickly into a full-fledged omnichannel core for banks with its Tachyon Suite. It has complete support for consumer core banking services, pricing, ledgers, and a typical core banking administration and configuration console. That HDFC Bank, India’s largest private lender, has embarked on creating a fully digital bank from scratch using Zeta’s platform testifies its fit as a cloud-native core. It is also noteworthy that BaaS platforms are now serious contenders for core transformation programs at many banks, where they compete with legacy and cloud-native core banking providers.
Can BaaS platforms in their current state be a like-for-like substitute for off-the-shelf cloud-native core banking systems? Probably not for digital transformation pursuits of large incumbent banks. Probably yes, with greenfield, challengers, and change initiatives at banks less than a decade old. BaaS platforms need to plug the whitespaces, which will qualify them to be a strong surrogate for cloud-native core platforms, but it looks like a small journey to traverse as it stands now. A concerted move in this direction can open up a large opportunity space for them and widen the choice for banks.
Disclaimer: Views expressed are my own and not those of my employer
