Banking 2.0— mapping banking tech neo-stack

13 min readApr 21, 2021

I have been evaluating the finance technology stack for the last few years. I would say now we live in a period of great banking technology reinventing. We are witnesses of financial institution transformation from bureaucratic and clumsy organization to digitally-enabled and mobile-first services. We see progress from two sides: legacy players are evolving and new emerging fintech players launch novel products. Great progress so far, but more needs to be done. Interesting that there is a group of companies that could benefit from both of these groups developing, different B2B software solutions could be applicable for the modernization of traditional banks or could be one of the “microservices” helping to create FinTech offering for nonfinancial businesses.

For traditional financial institutions reason for evolutions is clear. It becomes more and more difficult to run a business in the current environment: low margin, increasing competition, regulation, fraud, and legacy stack burden. And in the future, it becomes even worse. So probably in the future financial institutions will start to care more about cost and start to replace cumbersome legacy solutions (traditional banks spend 70–80% of their IT budget on maintenance). Perhaps Fintech newcomers will have an advantage due to their ability to build their stack using modern cloud infrastructure and add different functionality using 3rd parties API — drastically decreasing time to market the products.

The idea of this article is to show that you can build an entire bank or specific functionality for non-banking businesses using only 3rd providers. Leading challenger banks such as N26, Tandem, or O2 Banking have outsourced many of their core technology via BaaS partners (or ‘Banking-as-a-Service’). Such a BaaS partner helps companies assemble best-in-breed services, allowing them to launch prototypes and scale at a much faster pace while lowering initial CapEx.

Banking stack

In the beginning, let’s start with the banking tech stack overview. A modern digital banking platform usually consists of three layers:

1. The front-end: customer-facing application. Basically, it is an essential part of banking services because all the communication with customers goes this way. Design matters in finance as it is central to a products’ credibility. Design can build up trust or break it down very quickly. It can burden users with excessive information and friction that ruins the user experience.

2. The back-end: core banking system and data layer — the backbone of banking operation. Historically banks use internal build solutions or on-premise software for this purposes. Nowadays new cohorts of players offer fully-fledged cloud core banking solutions.

3. The middle-ware: product and operation layer. This layer is responsible for all banking functionality. As I mentioned above — now we can use 3rd parties provider via the API layer and do not spend much time on building products.

As shown above, banking architecture is very complicated, and the internal building of each specialized functionality (or micro-services) is complex, time-consuming. Services like payments processing, card issuing, or credit scoring will need to be integrated and orchestrated inside your platform. Instead of building each service yourself, now financial platforms can use proven providers who have already pre-integrated key features and are available off-the-shelf.

License

As in the famous quote stated by Stanislavsky that the theatre begins with a hanger, everything for a bank usually starts with a license. The license basically allows the financial institutions to provide all the services you typically expect from a bank: current accounts, money transfer and extend to more advanced products like landing or mortgage. In order to get this license, companies should pass a series of hard compliance, security, and data protection procedures from a regulatory authority (e.g. ECB in Europe). In Europe, there is a shortcut — E-money license. The EMI allows the financial platform to create a ‘digital account’ or an ‘e-wallet’. These e-wallets can support basic features like money transfers, card transactions, etc.

As previously mentioned, receiving this license from the ECB is a lengthy process that demands a great deal of patience and many FinTech start-ups/early-stage projects cannot afford to have their own banking license. Another option is to rely on the license of a third-party that can ‘shelter’ you with their banking or EMI license (under an agent or a license-as-a-service model). Companies like Fidor, Solaris in the EU, and Bancorp or Suttor Bank in the US basically provide ‘agency banking’ services, allow non-regulated entities to operate under their regulatory umbrella.

Core

The most important block of a financial platform is the core banking system (or the ‘CBS’). The CBS is the general ledger of a bank, basically the backbone behind the creation of accounts, balances, transactions, loans, interest rates, journal entries along with the storage of client data and other reporting tools. Very few banks actually have their own internal build core-banking systems, most of them rely on BaaS providers.

Leading CBS providers such as Avaloq, IBM, FIS, or Fiserv offer on-premise installations. These solutions are expensive and suitable for corporations with deep pockets. But we already see emerging new cloud-based providers, with a stronger focus on serving new digital services at a much more affordable installation price. Next-generation CBS specialists like Mambu, ThoughtMachine, Unit, etc are usually offering cloud solutions via a monthly subscription fee model, based on utilization instead of heavy project costs. E-wallets are usually relying on a much lighter and cheaper version of a CBS, let’s say a ledger instead, since most of the core operations and actual accounts are conducted by the custodian partner in the background.

Connecting account & payments network

The banking ecosystem is very complex: if a financial institution would like to have minimal functionality they should be connected to hundreds of entities: inside and outside the country because financial information can be valuable only in dynamics. Therefore banks should be connected with world financial data flow. The biggest problem is that many of these counterparts have different core systems and, hence, different data formats. There are at least dozens of integrations you will need to build and maintain to have even mediocre coverage.

In the USA Plaid solves this problem — it has a connection with more than 11000 financial institutions. In Europe, the situation is slightly different due to PSD2/Open Banking, which is a free feature for European companies. But financial institutions in the EU also may use prebuild solutions like Tink or Truelayer that build and maintain all of those integrations as a service. And important is that companies transform data in a ready-to-use format. Open Banking regulation helps to emerge new categories of businesses, like AISP and PISP.

AISP and PISP:

AISP and PISP are solutions that benefited from PSD2/Open Banking regulation. According to this regulation financial institutions are forced to share information with any other product or platform.

Account Information Service Provider (AISP): authorized to accumulate and share account data provided by banks and financial institutions. For example:

· Money management tools: the first approach to win a customer is to offer good UX for effective money management. Account aggregators organize users’ personal or business finances better. These personal finance tools bring together data from multiple bank accounts so a user can see all of his spendings in one place. For example, Fintonic helps to manage clients’ finances, such as spending analysis and alerts aimed to help them save and stay on budget. And the company is expanding in the next verticals and start to offer other products, like loan applications.

· Loan applications: one of the essential parts of the bank client’s interaction is loan or mortgage receiving. A subset of AISP uses this same capability to enable customers to quickly and securely share financial information with a lender or broker. Lenders also use derived data and metrics from account information to enhance credit and affordability decisions. Lenders benefit from better insights, while borrowers benefit from streamlined applications. E.g. Сredit Kudos can securely analyze bank account data which enables lenders to make a faster and more informed credit decision.

Payment Initiation Service Provider (PISP): authorized to initiate payments into or out of a user’s account. A more developed version of AISP has to not only track the financial information but also make a transaction on behalf of the clients

· Personal finance management: Several PFM apps transfer a small proportion of someone’s balance each week to savings account under a previously agreed process or a small fraction of each transaction go to a dedicated saving pocket. For example, the automatic savings platform Goin helps to collect money for some particular purchase, like travel or bicycle.

Compliance

Banks nowadays extremely regulated. A huge part of this regulation lays in the field of money laundering and customer identification. So we saw a lot of emerging players which provide these services on-demand. Modern technology helps to improve the current process, e.g. OCR (Optical Character Recognition) which helps to process documents faster, or biometric which increases the quality of customer identification. Or other solutions help to keep the regulatory database up to date: e.g. Corlytics monitor, assess, map, and align regulatory changes in order to alert relevant areas of the business.

KYC/KYB (Know Your Customer/Business): KYC/KYB compliance services help institutions with the identity verification of clients. The growing cases of financial fraud make the KYC/KYB process essential for running a financial operation. Financial institution usually has huge KYC/KYB departments and many things are done manually. They’re also a big amount KYC/KYB as a service provider: e.g. Onfido, which uses AI to “read” a person’s identity documents and then uses facial recognition and other data points to verify that a person is who she or he says they are online.

AML (anti-money laundering): AML solutions help to identify fraudulent behavior or transaction. Actually, it is a very big problem for financial institutions: only a small fraction of money laundering events caught. A new generation of tools could do it more effectively leveraging modern technologies and data sources. E.g. DX Compliance could prevent different kinds of suspicious behavior using ML mechanics monitoring transaction patterns.

Digital onboarding and CX

A long and complicated onboarding process could cost a lot in the long run. Many banks have counter-intuitive UX for onboarding, usually, this leads to early customer churn. One way for financial institutions to solve this problem to reimagine the customer onboarding process and build new UX inside from the scratch — is usually a long process with a lot is hidden pitfalls, the second option could be to use 3rd party provider. These companies provide services for customer onboarding. For example, nCino is a provider of cloud-based software for financial institutions. This is already a mature company, so they already provide a panel of other solutions, including customer onboarding.

Interaction with the customer only starts after the institution onboards them. It is critically important to have a seamless communication system with clients. A huge chank of communication goes via chat-bots these days: studies have already shown that people find phone calls tedious and slow as compared to instant chat. So financial institutions could use this technology for convenient communication with customers. Well-capitalized solutions like Finn AI or Kasisto offer SaaS chatbot solutions for financial services.

Lending & Morgage

Lending is a very important business for banks. But we already see more players outside the banking ecosystem who started to offer lending products, eg Klarna or Affirm. This kind of solution cannibalizes the traditional banks market, so they forced to digitalized faster. For example, many traditional banks have a partnership with Cross River Bank which distributed loans via marketplaces.

Morgage is one most marginal parts of the banking business. But in the current digital world tech unsavvy financial institution could lose their customers due to the mortgage application process complexity. New players solve this problem by offering a white label solution that powers mortgage applications on the site of banks. They do the typical process (usually data collection and application routing) faster, simpler, and more transparent. Leading players in this market are Blend & Rostify in the USA. In Europe, we see more and players who work in a field, like Oper & Appway.

Risk management

Risk management in banking has been transformed over the past decade, largely in response to regulations that emerged from the global financial crisis and the fines levied in its wake. But important trends are afoot that suggest risk management will experience even more sweeping change in the next decade.

Banks and Fintechs mainly deal with three types of risk. The first one is Credit risk, it is the risk that a borrower will not repay a lender, will repay late, or will not repay in full. Credit risk has usually estimated by credit scores and valuations. Today, financial institutions are adding additional intelligence layers such as social media or spending history to be able to assess the risk in a particular loan better. Eg Nordigen, Bonify, or Credit Cudos which is leveraging modern open banking infrastructure to create a more detailed risk profile. British startup SPIN Analytics develops RiskRobot, software for credit risk management in financial institutions and corporations. The solution applies big data management methodologies, machine learning, AI, and credit analytics to build advanced credit risk models.

The second type of risk is a Market risk, as its name suggests, the market risk arises because of the unpredictability of markets of all kinds. The Indian company G-Square builds AI-enhanced market risk analytics for banks, portfolio management entities, and other financial firms. The company employs market data science, deep learning, language processing, and business analytics in order to create insights that keep track of and manage arising market risks.

The final main type of risk is Operational. The category includes human errors, cyber-crime, or emerging technology. It is the broadest sector of risk management that includes a wide range of risks that financial institutions have to be aware of. A new generation of solutions helps to do it more effectively, e.g. BlackSwan Technologies help manage complex risk powered by AI algorithms. Or Third-Party Risk Management platform Mirato helping with the process of identifying, assessing, and controlling these and other risks presented throughout the lifecycle of the relationships with third-parties.

Insurance

A lot of banks now are dreaming about the super app — offer different services under one umbrella. Insurance could be this additional product and a marginal one (if the company does no spend a lot of additional marketing money on it). We see more companies that offer insurance via API. This trend also catalyzes by micro-insurance penetrations (i.e. small amount insurances only applying to 1 object and/or for a short time period), peer-to-peer-insurances, usage-based insurances (UBI). E.g. Neobank Revolut is partnering with Belgian insurance startup Qover to provide an embedded insurance solution to subscribed account holders.

Brokerage as a Service

W e are witnessing a boom in savings and investing apps and services. Companies like Acorns, M1 Finance, Robinhood, and others were seeing rapid growth in their assets under management (AUM) and customer base. Today you shouldn’t spend a lot of time building brokerage infrastructure inside your platform due to you could use 3rd solution for that. Brokerage as a service a white label solution for automated investing in funds, stocks, bonds, currencies, and much more. We saw companies in space, which provide B2B infrastructure, like Alpaca in the USA which raised round A last year. Companie’s API handles the banking, security, and regulatory complexity, allowing other startups to quickly build brokerage apps on top for free. Alpaca earns its money through payment for order flow, interest on cash deposits, and margin lending, much like Robinhood. Similar services also offered by more capitalized players as well, like DriveWealth and Interactive Brokers.

Cards

Until recently, launching a card offering was an extremely costly and time-intensive process. Newborn financial services have to develop a relationship with one of the small number of legacy issuing institutions, a process that could take many months. Then they would have to plow significant development resources into integrating their product with the issuer’s technology.

But nowadays things are different. You could not care a lot about card issuing this day than you building financial products. There are companies, which provide the tools for card issuance and management. For example, Marqeta global modern card issuing platform provides the essential infrastructure for managing physical & virtual debit & credit cards. Marqeta’s example enhances the current trend when non-financial companies start to offer financial products. The company works with Uber, Doordash, etc. Basically, nowadays integration is so easy and therefore many companies start to integrate them to upsell their customer base.

Virtual Asset Service Provide

Global adoption of crypto has accelerated. We see increasing interest in startups and developers’ space, as well as bitcoin price on the historical maximum. More and more retail investors became interested in crypto. So financial institution is forced to offer crypto trading features.

Building this infrastructure could be very expensive for institutions. The solution could be Virtual Asset Service Providers. For example, American Paxos, a regulated blockchain infrastructure platform, provide services for PayPal, Credit Suisse, Societe Generale, and Revolut. Nydig which providing a technology and financial services firm dedicated to Bitcoin for institutions, private clients, and banks, just raised $20m.In Europe, such kind of services provides companies like Aximetria or Tangany.

Conclusion

Financial services made significant progress in a couple of last years. One of the key reasons is the growing popularity of infrastructure “as a service”. These companies tackle complex financial service infrastructure making it easy to use. This transformation reduced the cost and difficulty to build financial solutions. Due to these players, newComers are able to launch companies faster and more cheaply. Existing financial services institutions are able to introduce new products quickly — and spend less on IT maintenance. And most importantly, this means more choices, better products, and lower prices for consumers.

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If you are building something in this space (or thinking about it) please let me know on Linkedin and I appreciate any feedback!

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Further reading:

Banking 2.0— mapping banking tech neo-stack

Written by Denis Kuznetsov