Banks go Lego – The future of banking services

Having survived the hype cycle, so-called “bank in a box” services will shift how banking and payments work over the next five years, creating new revenue streams for traditional banking players, more competition – and greater choice for clients.

By now, it’s commonplace to talk about the challenges facing retail banks – from legacy tech issues through unfavourable macro-economics to increased competition from neobanks and technology giants.

Much less has been written about the opportunities banks can look forward to, including so-called “bank in a box” services.

Unboxing the box 

The term “bank in a box” describes integrated solution sets sold to third parties by major banks to enable non-banks or smaller banks to operate a wide range of banking services.

In plain English, this could mean a supermarket offering a credit or debit card; or a neobank offering small business loans supported by capital and risk decision engines bought in from a major player.

Craig Ramsay, Managing Director Business Development at payment processing and digital ledger firm Episode Six, says big banks have an attractive service proposition for smaller players and non-banks.

“Having a banking license is key to the provision of banking services – and that means being a regulated entity, which is expensive.

By accessing services through the “bank in a box” model, smaller players can offer a wider range of services without having to take on associated development, regulatory and compliance costs.”

Ramsay sees two main streams of opportunity for banks, in consumer banking and corporate banking services for SMEs.

And he’s not alone: Bain and Company recently described “bank in a box” services as “a second growth engine, revving to get started” for beleaguered high-street banks.

According to Mordor Intelligence, the Banking-as-a-Service market is set to grow by nearly 27 percent per annum over the next six years to reach $14.7 billion – a decent return for banks selling access to systems they’ve developed and maintained for decades.

B2B – the bigger opportunity? 

Ramsay argues that SME and corporate banking services represent the greater opportunity for banks, in part because SMEs remain historically under-served with regard to services such as loan origination and working capital guarantees – and also because business-to-business payments dwarf the consumer segment for sheer size: corporate payments hit $3.8 trillion last year according to Brainy Insights – almost double the size of the consumer market.

Market size aside, there are other factors that make buying in banking services for SMEs attractive.

For one, SME dissatisfaction with access to capital keeps getting worse – all over the world.

Companies like Norway’s Aquila, a boutique firm focused 100 percent on the rapid provision of working capital to SMEs, have doubled in size over the last four years: hardly surprising when only four in ten SMEs across Europe say they have adequate access to loans, purchasing cards and working capital services.

In 2023, trade journal “SMEs Today” described the state of loan financing for SMEs as “a catastrophe that’s getting worse.”

Good for SMEs, good for intermediaries 

Of course, outsourced bank services don’t just help SMEs.

The intermediaries who sell bank services to SMEs also benefit from a single monthly fee, enabling them to control costs, as well as avoiding the need to hire expensive regulatory and compliance skills and invest in software development.

While the bulk of those currently benefitting from “in a box” services are SME finance brokers such as and neobanks, comparison sites are also emerging that promise to sharpen competition and improve service delivery for SMEs.

Finally – and most obviously – such arrangements are beneficial for the banks themselves.

Ramsay says that providing services through third parties “creates a funnel of new clients for the banks themselves” as micro-businesses working with intermediaries grow to a size where they become a target for big banks.

McKinsey and Company concur with this view, demonstrating how banks that attract more SME customers grow 32 percent faster than their peers.

Retail banking: Lego-fication 

If the SME market promises much, then retail banking is an altogether different beast.

Historically, banks have been more reluctant to package out their retail services as these go to the heart of how they earn their corn: providing mortgages, credit cards, loans and account services to the general public.

However, competition from new, digital-first players has changed this situation somewhat.

Although digital players have picked up a lot of accounts over the last decade – around a quarter of the UK population had a digital-only bank account in 2023 – most consumers still run the majority of their banking needs through major high street institutions.

What’s more, some companies claiming to provide banking infrastructure do so on the basis of outsourcing from major banks as they are not regulated entities – mitigating the value of their services to their clients as they re-purchase white-labelled banking services.

From banking services to experiences 

While most of us are familiar with brands such as UK supermarkets Tesco and Sainsburys’ offering banking services through RBS and Halifax respectively, this picture may be about to change.

According to Jonathan Vaux, Head of Propositions and Partnerships at next-generation issuer and processor Thredd, retail brands offering banking services “are now less focused on what products to offer as much as the customer experience.

So for a Tesco, for example, offering a digital wallet with payment and loyalty at the same time matters more than simply offering a debit card.”

 “Retailers are less focused on banking products than on customer experience”

Given that banks have historically proven more adept at generating interest margin and managing regulation and compliance than delivering a great user experience, it’s likely we’ll see a “win-win” scenario emerge, in which banks offer their regulated services to consumers both through their own channel and through third parties.

The twist in what comes next, though, lies in how third parties deliver banking services.

Whereas high-street brands like Virgin or Carrefour have until now sought to offer a wide range of banking services, from credit cards to current accounts and loans, it’s likely we’ll see more brands offer more select services in the future – an affinity card from a sports club, for instance, or a mortgage product through a housing association.

In this future, banks will have to emphasise access to a wider range of their services individually, rather than as bundles, or packages.

“I call this the lego-fication of payments”, says Vaux. “Banks are going to offer their services as building blocks, rather than in packages – and third parties who offer services to consumers are going to be able to select what they need, instead of buying all their banking services from one provider.”

Effectively, this means banks are going to take on a role similar to that which Visa and Mastercard are trying to create for themselves in payments.

From their previous position of providing a brand and payment network, Visa and Mastercard are now selling themselves at every step of the process, from authenticating new customers through to faster settlement.

In the same way, tomorrow’s banking services market could feel like a digital department store in which retailers pick and choose what they need from the services on offer.

The challenge for banks will be to compete effectively across as wide a service range as possible.

 “Banks will need to compete effectively across as wide a service range as possible.”

The implications of this scenario are that services themselves – issuing, acquiring, processing, compliance, security – could become commoditised.

What will matter more, however, is the capacity to integrate services rapidly and effectively – as well as expertise in areas such as the deployment of cross-border services, regulation and customer data analytics.

These days, most customer-facing companies assess problems as technology challenges, so the ability to offer advice and expertise could end up meaning more to banks than simply offering acquiring or processing services.

Whatever happens, it’s clear that reports of the death of high-street banks have been grossly exaggerated.

Banks will continue to flourish, albeit in a very different form to what we know today:  enabling services for other companies, rather than offering those services directly themselves.

And if that implies greater competition across the board, then most banks would argue they’ve already been dealing with that situation for years.


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