Banking-as-a-Service Versus Upgrading the Core

Digital banks have gained popularity recently and traditional banks have two ways to launch them. A bank can carry out a core upgrade and replace its mainframe with a fully digital bank in the cloud. Or a bank can keep operating its old system while launching a new bank that appeals to specific target markets. I recently discussed this topic with Arcady Lapiro, founder of the fintech Agora Services, and he explained a few more reasons why creating a separate bank might be the best solution. Agora Services currently plans to release its Banking-as-a-Service (BaaS) software to banking customers in February 2021.


Startups May Lack Core Upgrade Expertise


Upgrading a bank’s core technology is a major project that I discussed in a previous article about Agora Services. Just because a startup raised a few funding rounds from a venture capital firm doesn’t mean that it already has a fully built and operational platform. A capital raise also doesn’t prove the startup is capable of leading a project like this. Banks will want proof that the new cloud platform successfully replaced the old mainframe. Arcady explained that when that happens, the bank would normally publish a press release about it.


Several startups are developing software for streamlined core upgrades. I previously discussed one in my article about Finxact. But it’s another matter to complete an upgrade successfully. The fintech founder pointed out one startup that was attempting to do this a few years ago. That startup pivoted to developing a stand-alone digital platform for banks because that was a more achievable goal. Arcady showed me an example of a competitor’s offering and his platform had many more features.


Banking-as-a-Service Platforms Are Designed for Customization


A cloud platform that simply duplicates the functions that the mainframe provides with better technology may not provide as much of a performance gain as the bank expects or needs. Fully cloud-based banks offer modular design and new features. Arcady showed me an article from Tearsheet about how Banking-as-a-Service works. Banking platforms frequently design custom features for specific neobanks, such as virtual cards, and then roll them out to other customers later. They can also design pricing models that only charge banks for the specific features they’re using. Other banking software providers may not offer as many customization options.


Banks are still working on their moves to the cloud. Many US neobanks are simply building middleware on top of the legacy systems that their banking partners are using. Neobanks in the European Union have made more progress toward cloud banking, but will still need more time to fully complete the transition. So these startups can customize their middleware, but not the core banking software that their partner is using, which limits the features they can offer. Banking-as-a-Service platforms offer banks this flexibility right now.


A Bank Needs Skilled Staff for a Core Upgrade


I also talked to Arcady about banks’ digital upgrade plans. A lot of banks decided not to upgrade their core systems in 2020 as their focus was to have their businesses up and running. That surprised me because of the rapid growth in digital commerce during the year. More people are shopping online, more people are using contactless payments, and mobile payments are also gaining acceptance. But replacing a core banking system requires a lot of work from the bank’s IT staff and its managers, and they may be very busy working on other projects right now. Banks are processing lots of PPP loans and refinancing applications right now and may not have much spare capacity available. This may change now in 2021.


These systems, also known as a bank in a box, don’t require as much IT support to set up. Banking-as-a-Service platforms, or digital banks, are separate from the main bank’s systems so the IT staff don’t have to make any changes to use them. The banking platform has its own IT staff to support the digital bank. And like other neobanks, the platform has a partnership with a licensed third-party bank that can make loans and provide additional support to the digital bank’s customers.




Carrying out a full core upgrade may not be a realistic option for many small banks and credit unions, even if they recognize the benefits of launching a digital bank. Many of these banks came to the same conclusion independently in 2020. But these small banks and credit unions still need a solution that helps them remain competitive with neobanks and the major banks’ apps. For these banks, a platform that offers Banking-as-a-Service may make sense. The platform will allow them to quickly set up a stand-alone bank catering to younger customers who expect features that the main bank doesn’t currently offer.


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