The theory and practice of BaaS, George Toumbev, Chief Commercial Officer, NatWest Boxed

By Vriti Gothi

Banking-as-a-Service (BaaS), providing retail banking customers with financial products and services at the point of need, is being touted as the future of banking. IBS Intelligence speaks to George Toumbev, Chief Commercial Officer of NatWest Boxed

NatWest’s Banking-as-a-Service business, NatWest Boxed, recently announced a seven-year partnership deal with Saga, the leading UK provider of products and services primarily tailored for the over-50s. In this partnership, Saga Money will use Boxed’s embedded finance platform to launch a suite of savings products to millions of Saga customers, as well as attract new savers.

The partnership with Saga is Boxed’s second deal this year, following news in Q1 that The AA is using Boxed’s embedded finance platform to offer instant access savings and unsecured personal loans to personal breakdown and insurance members, as well as the wider market.

IBS Intelligence asked George Toumbev. Chief Commercial Officer of NatWest Boxed whether we should draw a distinction between embedded finance and embedded banking? “Embedded finance is more of an umbrella term, and it can encompass different products and propositions. Embedded banking, as I would define it, is embedded financial products with a full banking licence and balance sheet behind them and all the banking processes that wrap around that.”

What prompted NatWest to create its own BaaS solution?

“There are a couple of big trends driving this, but the first and most obvious one is that consumers are increasingly going to engage with banking products away from the banking channel. Most retail banking revenues, let’s say post-2030, will be away from the banking channel. Banks need technology to embed themselves where consumers want to engage with a product. Why? Firstly, they need to find growth and protect their market share. Secondly, banking or financial products are already heavily regulated and very complex… and likely to get more expensive and more complex as we look to protect the consumer. Banks are best placed to be the manufacturer of these products, but they need this technology to embed themselves and remain relevant.”

Are there limits to what even a big brand can do in terms of embedding a service?

“If you take the simplest view of what BaaS is, which is a brand that wants to use a financial product and the provider, in this case, NatWest Boxed, what the brands bring to the party is commercial viability and scale – they’re the ones that find the consumer. As with any product, there needs to be a key problem to solve, a clear need.  What’s very important for these brands is they need to integrate the products in a coherent way to their core strategy. Take Nike, one of the biggest brands in the world, it’s not coherent for it to offer a savings product. The limits of these brands are what they’re going to do with embedded finance and how it adds value to their core strategy. Also, they need to do it in a way that is scalable. If you don’t scale it, you’re not going to make it commercially viable in the longer term and it will just wither on the vine.”

Is there a trade-off in opting for FinTech technical excellence or banking credentials?

“You need both. Technical excellence is important to have scalability, speed of service and interoperability. I’m using generic terms here, but effectively, you need the thing to plug in and work, and it needs to be available around the clock and work quickly and well for consumers. In terms of balance sheet strength and regulatory approval, those are the ingredients that allow you to be sustainable and safe in the long run and achieve your potential.

“Generally, you need, especially with lending, to have access to a large balance sheet – cheap cost of capital – to allow you to be competitive in the market. And of course, you need to do it safely. The focus on consumer duty and customer outcomes is greater than ever.

“As these products proliferate and it’s easy to embed them in APIs, plug them in everywhere, you can imagine risk proliferating in the
market where the distributor of the products is going to be less and less ‘au fait’ with the regulatory construct. So, there needs to be a
mechanism and a framework to ensure that proliferation happens safely because it is happening and it will happen. So, that’s why you
need a partner that can give you the assurance that these products are designed, manufactured and distributed in the right way.”

How is the revenue generated between the banking partner and the brand?

“If we start with the brand, firstly, there is, especially for large consumer brands, the business case around incremental sales. By having this proposition, they’re either going to increase basket size,  increase conversion or drive revenue. It’s a cross-sell game. “Clearly, there’s a revenue share aspect between the two parties, generating a new revenue stream. Finally, there are matters of efficiency and cost avoidance. We know it’s expensive to run regulated products.

“Using a BaaS provider allows companies to accelerate certain things in terms of roadmaps and crucially it means they don’t need to have a risk management or compliance function because that’s been outsourced. So, that also creates value. For the providers themselves, there is growth in terms of the balance sheet, more assets
and liabilities or interest income, which is shared with the brand. It depends on the commercial construct. And there’s fee income around
running these platforms as well.”

Is it really possible to create a unique range of products for each brand client?
“For embedded finance to scale, you need standardised products. Typically, customisation is the enemy of scalability and profitability in most financial services business models, not just embedded finance. The way to think about it is you can create differentiated propositions for brands, by curating your product modules, your Lego blocks in different configurations, if you like, to give a different client customer experience or so on.

“Certain brands may want to choose to give away margin to win market share. That’s a pretty standard strategy. We work with our clients to come up with pricing strategies aligned to their ambition. There’s a difference between a bespoke suit and off the peg, and embedded finance needs to be in the off the peg analogy otherwise it won’t be commercially sustainable longer term.”

Trust is a pressure issue – customers trusting the brand, the brand is trusting the bank. How do you protect that trust?

“Trust is sacrosanct, every business will say ‘our customers are the most important’. Switching from one clothing label to another
is instantaneous or from one kind of luxury brand to another. So, consumer trust for such brands is crucial.

“In technology, trust is gained by delivering on your promises on time and consistently. At NatWest Boxed this is probably one of our biggest differentiators. Our pedigree comes from supporting 19 million retail customers in the UK, which starts with setting the right standards.

“That’s probably step one in the trust game. Then you focus on the things that are important, like service quality, fraud security, for example, the things that are going to maintain this trust for your clients. You back that with the right capability and capacity so you can scale safely, and you focus on that consistently. That kind of operating model is key for trust.”

Will there be a new normal of people managing all their finances at their favourite shop, at their favourite brand?

“I think the honest answer is ‘no’ but probably the new normal is that customers will not be turning to their bank for all their financial needs, they may turn to their favourite brands. But equally, it’s not the new normal that any brand will do it. I refer to my Nike example. There needs to be strategic coherence between the brand and offering embedded finance in order to make it viable.”