The New Lending Industry, a Word Salad, Part 2
Following the article ‘The New Lending Industry, a Word Salad, Part 1’, we offer an Exploration of Some of the New Terms and TLAs
Introduction
Whoever said that the lending industry is boring and never changes clearly isn’t up to date on their reading! With the exponential growth of fintechs and mobile lenders over the past decade, a whole plethora of new products, terms and TLAs has emerged.
If all of this is confusing, there is no need to fear, in part 2 of this article, I have put together more descriptions and explanations of some of the commonly used terms in what has become the new lending industry paradigm.
Terms:
Embedded Finance
“Embedded finance is non-financial companies offering financial products and services. It could be an e-commerce merchant providing insurance, a coffee shop app that offers 1-click payments, or a department store’s branded credit card.
Effective embedded finance solutions meet the customer where they are with a financial option they need, whether that be a loan, payment program, insurance plan, or something else.
One of the key elements that define embedded finance is that it’s a financial service offered outside of the traditional ‘going to the bank’ context. Embedded finance brings financial services to the exact moment it’s needed, instead of being an entirely separate part of a consumer’s life.
Some embedded financial services have been around for a while, like airline credit cards, car rental insurance, and payment plans for high-priced items. Now embedded finance is taking hold online, as e-commerce retailers are offering banking services directly on their websites without re-directing customers to a bank. This phenomenon is enabled by third-party ‘banking-as-a-service’ companies that use API integrations to embed financial services into the user experience of non-financial companies.”
Banking as a Service (BaaS)
“Banking-as-a-Service (BaaS) describes an ecosystem in which licensed financial institutions provide access to their services to non-banking businesses, via API.
The non-banking business integrates these services with their own technology using simple, developer-friendly API calls. Then, they can use that infrastructure to build their own tools, interfaces and user experiences to help their clients and streamline their own operations.
Until recently, this model wasn’t possible. Traditional financial institutions were built on bespoke, legacy tech platforms that limited their ability to integrate with their client’s own products and services. Their clients would then have faced the significant challenges associated with integrating cumbersome proprietary banking technologies into their own tech stack – a bit like building a new sports car and then attempting to put a 40 year-old tractor engine in it.
That’s without mentioning the significant regulatory hurdles a non-banking business would have to overcome, possibly requiring an entirely new team. Long story short, embedding banking services used to be an expensive and time-consuming proposition.”
“While BaaS and embedded finance are linked, they are not the same thing. BaaS is the tech stack that sits behind the scenes, covering all the relevant regulatory requirements and the technology that delivers financial services via an API. Embedded finance describes the customer-facing layer that sits on top of this infrastructure. Embedded financial services are built on BaaS, but BaaS does not necessarily involve embedded finance.”
Open Banking
“Open banking is also known as “open bank data.” Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry.”
”Under open banking, banks allow access and control of customers personal and financial data to third-party service providers, which are typically tech startups and online financial service vendors. Customers are normally required to grant some kind of consent to let the bank allow such access, such as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then use the customer’s shared data (and data about the customer’s financial counterparties). Uses might include comparing the customer’s accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles or making new transactions and account changes on the customer’s behalf.”
Application Programming Interface (API)
“In fintech and banking, API is used as a method of communication between third parties and online banking systems. For instance, an independent payment or financial service provider can access certain data about a certain user through his or her bank account by relying on the already undergone KYC process. However, unlike the critics argue, a banking API can be granted access to customers’ data only after full consent is given.
Banking API is the process of exposing banking functions as a web service so that they can be accessed by third-party companies. This makes business processes more efficient, as it allows different parts of the organisation to work together in a coordinated manner. Additionally, APIs can help third-party companies build products around banking services. This means that customers can use the APIs to get real-time updates on their accounts and perform transactions without having to go through a bank representative.
Different types of APIs come with different target solutions and usages, but as outlined by Fintech Ranking, these are divided in:
- Core banking (for deposits, lending and SME cross-border);
- Plug & Play (trading, accounting routine, oAuth)
- Cards, wallets and transfers (SDK stock, Multi-currency, fraud monitoring and others);
- Acquiring (mobile and alternative phone payments, NFC solution, online card acquiring and others).
REST is an architectural style where messages are sent in a single direction while SOAP is a messaging language that allows for two-way communication. REST and SOAP provide different benefits to businesses, such as scalability, security, and data transmission efficiency. However, integrating a banking app or website with an API is easy and quick, making it simple for businesses to take advantage of all the benefits these platforms have to offer!
The APIs also have full support for international transactions, making them ideal for global businesses. Finally, scaling is easy because the platform supports unlimited payouts from one account number. This makes it possible for businesses to process payments in bulk quickly and easily, saving time and money.”
API-driven Architecture:
The ADEPT Decisions Platform is an example of an API-first software development.
“API architecture refers to the process of developing a software interface that exposes backend data and application functionality for use in new applications. With an API-first architecture, you can create ecosystems of applications that are modular and reusable — which is ideal for microservices.
Briefly, API-based architecture is the practice of designing and building the programming interface(s) and then starting the development of the application per se based on this environment and workflow model. Thus, this architecture is different from traditional development strategies.
The terms API-driven architecture, or API-first development, have been in use since about 2010, but it is only in the last couple of years that they have come into popular use in the IT sector as more and more software delivery teams have recognised the benefits it provides.”
“The benefits of an API-driven architecture are significant:
- Make everything accessible at any time and phase
- Decoupling frontend and backend
- Modular Continuous Integration/Continuous Delivery (CI/CD) pipelines
- Cloud-optimised applications
- Simplifies application complexity
- Reduced development time
- Avoid software obsolescence.”
Software as a Service (SaaS)
The ADEPT Decisions Platform is provided to clients as Software as a Service.
“SaaS is a licensing model in which access to software is provided on a subscription basis, where the software is located on external servers rather than on servers located in-house.
Software as a Service is commonly accessed through a web browser, with users logging into the system using a username and password. Instead of each user having to install the software on their computer, the user can access the program via the internet.”
Summary
This is the last in this series of ‘Word Salad’ articles, but I am sure that as time goes on and more technologies evolve, there will be the need for additional articles on this topic in the future. If all of these new, and not so new, terms appear daunting, remember the immortal words of Charles Darwin, as to why embracing change is of such importance!
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
About the Author
Stephen Leonard is the founder of ADEPT Decisions and has held a wide range of roles in the banking and risk industry since 1985.
About ADEPT Decisions
We disrupt the status quo in the lending industry by providing lenders with customer decisioning, credit risk consulting and advanced analytics to level the playing field, promote financial inclusion and support a new generation of financial products.
