Today, all over the world and in Russia, perhaps, first of all, there is a unique opportunity for a radical reorganization of the banking sector, a transition to a fundamentally new model of the financial system.
An era of change
Classic “analog” banks have been automated for a long time, and many of them are forced to work in the now outdated IT architecture. A large number of various software is installed inside such banks, which is often scattered and poorly integrated both among themselves and with external solutions: seamlessness between systems is absent, as well as open API (application programming interface) everywhere. Product development tools are often very archaic. For example, in an outdated banking IT architecture, there is a duplication of products and information in different systems: ABS (automated banking system), RBS (remote banking service), card processing, which must be maintained and updated synchronously. Often, many banks add ESB (Enterprise Service Bus) systems to their architecture, which only exacerbates the duplication problem and increases costs.
Traditional banks operate in 24 × 7 mode, and it is extremely difficult, and most likely even impossible, to modernize their IT architecture without stopping payment processes. Bankers have only very little time to idle periods, otherwise customers dissatisfied with the service will begin to move massively to other banks that are more stable from a technical point of view. Modern technologies for non-stop software updates are often not available to banks primarily due to outdated architecture.
There are several other factors that weigh heavily on the shoulders of banking veterans. These are high overhead costs due to the bulkiness and inefficiency of processes, the need to maintain an established business model, including operating offices, numerous personnel, constant pressure from the regulator plus the highest requirements for information security.
In this situation, the so-called neobanks, banks without offices, without paperwork, come to the fore. Unencumbered by the legacy of old software and bureaucracy, they often start with more modern technologies and attract qualified IT specialists. The processes of such neobanks turn out to be simpler and more flexible than those of the patriarchs of the banking industry: changes are made faster, services for customers are quickly adapted, third-party fintech solutions are seamlessly integrated, etc. And neobanks at the start of their financial business are often subject to simpler requirements of regulators. However, very often neobanks build their services on top of any existing banking infrastructure, replacing only user interfaces with modern ones. Rarely do neobanks try to create a full-fledged digital bank architecture.
Neobanks such as Simple, Moven, Hello Bank, Bank Direct, Atom Bank, Monzo, Revolute, Nubank and others have appeared in the West, which are actively crowding out analog old-timers in the banking industry. For example, on December 9, 2021, the Brazilian Nubank went public on the NYSE, its valuation reached $45 billion, making it the most expensive neobank.
And in the Russian banking sector, newcomers entered the market: Tinkoff Bank, founded in 2006 (in 2016, the international consulting company Frost & Sullivan recognized it as the largest neobank in the world, in 2024 it was renamed T-Bank), Modulbank, Tochka, Rocketbank, Touch Bank, TalkBank. By 2016, according to the Burnmark research center, there were already about 70 neobanks in the world, including 40 in the UK, 8 in India, 5 in the USA, 4 in France, and 3 in Germany.
Following purely banking players, IT companies began to enter the financial market: such market giants as Apple with Apple Pay Cash, Alibaba with AliPay, TenCent with WeChat Pay, Google with Wallet, Xiaomi with Mi Pay and many others in the West and East. In Russia, an example is the IT corporation Yandex, marketplaces Wildberries and Ozon, whose fintech direction already exceeds more than 30% of the total business revenue, and the results of the completed 2024 puzzled the banking community with their success. Ozon-fintech revenue almost tripled to 93.3 billion rubles, profit before taxes increased 2.3 times and exceeded 26.5 billion rubles. The number of active clients at the end of December amounted to 30.3 million people, the amount of their funds on deposits and accounts increased 3.6 times, to 193 billion rubles.
Telecoms are also not asleep. For example, MTS Corporation has long been building its ecosystem together with its bank. Beeline also has its own fintech direction. Even developers entered the banking business.
Perhaps in the coming years we will see several more “black swans” for the traditional banking market, which will begin to squeeze old-timers aggressively. All this leads to the loss of huge financial markets by classic banks. And if they do not keep up with their innovative development, then with such a rapid loss of market niches, daring newcomers will oust “analog” banks to the sidelines of history.
Today, the banking system of the Russian Federation is experiencing unprecedented sanctions pressure. When switching to a peaceful track, problems with loans from defense enterprises will appear, the population is overloaded, we face the crisis among developers, and a sharp decline in sales in the automotive market, which means that there may be a significant number of defaults in various industries.
It is in such a crisis situation that the possibility of a radical redrawing of the financial market appears. Newcomers to the financial industry or even its outsiders, having started in the forefront of neobanks and fintech projects, or, moreover, equipped with the most modern Bank-as-a-Service platform, can break into the leading group of Russian banks at tremendous speed. Absolutely everything favors this.
A big plus for Russia is the fact that in our country there are developers of Bank-as-a-Service platforms who have successful experience of working abroad. There are also impressive, but true, still isolated examples of Russian banks operating using this technology. But the market will quickly become saturated with financial institutions operating according to this standard. “Delay is like death, “as the classic of the Russian revolution wrote.
What is Banking-as-a-Service (BaaS)
Bank-as-a-Service (BaaS) is a financial model that allows banks to provide banking products to non-banks through application programming interfaces (APIs). Emerging in the 1990s, BaaS began with traditional retailers partnering with banks who provided them with financial products, thereby transforming the banking landscape into a collaborative ecosystem. The advent of the Internet and digital technologies has since accelerated the promotion of the BaaS model, making it the main innovative approach to the early 2020s, with significant participation from both traditional banks and fintech companies.
The rapid development of BaaS has been driven by technological innovations such as cloud computing and AI that have improved operational efficiency and customer experience. In addition, the growing interest in embedded finance, where companies integrate financial services into their existing services, has unlocked the potential of BaaS by providing direct, seamless access to banking for customers of these companies.
BaaS platforms provided ecosystems with computational efficiency (reducing transaction costs by 10 or more times), scalability and flexibility. By moving operations into the financial ecosystem, non-banking companies can reduce infrastructure costs and expand their range of services, thereby dramatically strengthening their competitive position. This allows lower-cost banks to process data in real time, adapting to changing market dynamics and customer needs.
In our opinion, there is a fundamental difference between the concepts of digital bank and neobank. We refer to digital banks as primarily banks that are built on BaaS architecture, while neobanks are rather more successful banking applications from the point of view of user experience that can be connected to archaic banking architecture. A full-fledged digital bank can place on its platform an unlimited number of different neobanks, including those created by third-party fintech development teams.
Banking-as-a-Service in the USA
The concept of Banking-as-a-Service (BaaS) has changed significantly since its inception in the 1990s. Initially, major retailers such as Tesco and Sainsbury’s partnered with banks to offer financial products and lay the groundwork for a joint financial ecosystem. As technology has evolved, traditional banking practices have undergone transformational changes, in particular through the introduction of electronic funds transfer (EFT) systems back in the late 1970s, which allowed customers to conduct transactions without physical cash. This innovation played a key role in preparing the ground for the subsequent online banking revolution.
The 1990s marked a pivotal decade with the advent of the Internet and the World Wide Web, which laid the foundation for e-commerce and online banking. In this era, large online retailers Amazon and eBay appeared, as well as technological innovations such as the first SMS text message and the creation of PayPal, which ensured the introduction of electronic money transfers.
As the 21st century approached, technological advances such as the rise of the internet and digital platforms have further advanced the BaaS model. The growing interest of non-financial brands in introducing financial products into their client services has contributed to a change in market dynamics, contributing to a more comprehensive approach to banking services. By the early 2020s, BaaS is turning into a promising innovative service, and banks are directly collaborating with technology providers to improve their services qualitatively.
In 2025, 30% of banks with more than $1 billion in assets in the United States are expected to implement BaaS solutions, reflecting the growing popularity of the model in the financial sector. The BaaS market is projected to reach $75 billion by 2030, with a CAGR of over 16%. This growth trajectory is driven by the growing demand for digital banking solutions, as companies will increasingly use BaaS to improve customer engagement.
Artificial intelligence and mathematical tools
Artificial intelligence (AI), machine learning and mathematical models have begun to redefine the banking landscape. These technologies enable real-time data analysis, improving risk management and fraud detection capabilities. AI algorithms help create personalized customer experiences with custom recommendations and chatbots that optimize customer service.
The AI-powered ecosystem analyzes customer behavior, preferences and risks to offer personalized financial products and services. AI is integrated into the BaaS platform. AI integration extends beyond the traditional banking business, fostering innovation that supports co-financing and optimizes business processes across the sector.
The most modern mathematical models enable to make sufficient complex calculations in real time, for example: to solve the problem of managing liquidity in multi-currency financial platforms. In particular, in 2023, the authors of the Russian BaaS platform “Digital Dynamics” developed a similar mathematical model (Frolov, V.N., Vatolin, A.A. & Romanchuk, A.P. Asset Tokenization and Related Problems. Proc. Steklov Inst. Math. 323 (Suppl 1), S98–S112 (2023)).
Thus, modern mathematical tools, being built into BaaS platforms, can qualitatively change the nature of the tasks to be solved, such as tokenization of assets, settlements through digital financial assets, construction and analysis of barter chains and netting chains, as well as a number of other analytical problems.
Will the market lose interest in BaaS systems?
Since various forms of BaaS solutions have existed for a long time, there is a temptation to declare BaaS solutions a certain stage already passed. However, we believe that BaaS systems continue to evolve and rapidly develop over the years.
The main, in our opinion, problem of many BaaS solutions in the foreign and Russian markets is often their limitation exclusively to payment functions. In many cases, a BaaS solution consists only of providing card acquiring services or solving mass payment problems. Many have learned to cope with this task over the decades.
However, the above features are just a small part of what a complete BaaS solution can and should provide. In our opinion, the BaaS platform generally satisfies all the product functionality of a modern bank, and even more. If a bank is built on the basis of such a platform, then it can be classified as a full-fledged digital bank, and integrated banking solutions can already be built on the basis of the digital bank platform.
How is a full-fledged BaaS platform created?
Such developments do not appear from scratch. Designing such projects is always fundamentally difficult, so there are only a small number of teams that can develop BaaS platforms. It is impossible just to issue an order in the bank to start developing your system, since you need to assemble a full-fledged versatile team, teach them to communicate in the same language, formulate requirements, and actually take people out of the bank’s operating activities and “out of the comfort zone.”
The most successful products are created by teams that have worked in the banking (and generally financial) sector for many decades, have academic training in mathematical modeling. Moreover, often the most successful product is obtained only from the 3rd, or even the 5th version, each of which with its market approval takes up to 5 years, and all the previously accumulated practical experience should be taken into account. It is important to diversify projects, and not just focus on banking operations. For example, experience in trading, tokenization, Islamic finance and especially international experience is extremely important. Very often, the narrow specialization of platform developers only in the Russian market prevents in the future to scale correctly projects to other countries with foreign expansion.
It is important to note that when designing BaaS platforms, it is necessary to lay down the requirements and restrictions of regulators that exist for financial applications in different countries. In particular, in the Russian Federation, it is important to comply with the requirements of the Central Bank in terms of customer identification, financial monitoring, the method of confirming transactions, as well as compliance with the special security profile of the system, which will be discussed below in a special section.
The Bank-as-a-Service solution assumes the format of a platform b2b business, which is aimed at two groups of clients at the same time:
- on the one hand, traditional banks, for them connection to the BaaS solution allows to get a modern high-tech API platform and expand the list of their services,
- and on the other hand, SaaS companies and IT developers who will be able to integrate banking services into their product line.
Two main categories of services are offered to customers:
- The work of the ecosystem on the BaaS platform with banking services through the API is embedded and integration banking with a large set of ready-made basic banking services.
- Specialized unique services of the BaaS platform – for example, cross-border transactions based on settlements between clients using barter chains and tokenization of arbitrary tangible and intangible assets, for example, operations with precious metals, kilowatt-hours, square meters and any others.
Also in the requirements for the BaaS system there are a number of additional conditions, namely:
- a high degree of automation of operations, which makes it possible to radically (by 10 or more times) minimize the number of personnel in a financial institution and, as a result, obtain a significantly lower cost of operations;
- the ability to conduct business continuously with the installation of all updates without interruption to customer service;
- high speed of system development and fast delivery of developed products to the client with passing all stages of quality control, information security standards;
- the ability to deploy a new BaaS installation in the shortest possible time (2-3 months).
Digital bank architecture on BaaS platform
We believe that one of the basic principles in the design of a BaaS platform is the principle of sharing responsibility between banking systems. In particular, we propose to move all tasks related to the development of banking products outside the ABS (automated banking system), leaving only basic functions for ABS, such as correct accounting, reporting in accordance with the requirements of regulators, and some others related primarily to the fulfillment of regulatory requirements.
This approach makes it possible to simplify significantly the development and testing of banking products, since ABS, as a rule, rarely comply with modern development principles, such as the presence of automatic tests, versioning, CI/CD (continuous integration and continuous deployment of software during development), not to mention the impossibility of using modern programming languages, as well as often tight binding to foreign commercial products (for example, Oracle).
As a result, we get the following formula for the ideal architectural device of a modern digital bank:
Bank/NPO = [Accounting and Reporting] + [Services/Products] + [UI/UX]
We propose to implement everything related to Accounting and Reporting in ABS, everything related to Services and Products should be on the side of the BaaS platform or microservices directly connected to it. And the third level – UI/UX – is a variety of mobile, web, chatbots or other applications that already implement a huge variety of user interfaces by connecting to the API layer of the BaaS platform.
Of course, banks have other systems, such as CRM, card processing (internal or third-party), SBP gateway, payment systems, etc., but all of them are already auxiliary in nature for banks and integrate either with the BaaS platform, or, in extreme cases, with ABS.
In fact, every bank connected to the BaaS platform automatically becomes a high-tech digital bank with an API. If you have your own or involved team, the bank or ecosystem operator will be able to develop its own product line based on the Platform’s functionality and focus on the final products, since the BaaS platform takes care of all the nuances of automation and integration of the bank’s internal systems.
Strengthening information security
The problem of information security and protection against hacking for the BaaS platform is key one, since any problems in the API can turn into multi-billion dollar losses for financial companies. Until now, it is security problems that are the main problem of launching BaaS solutions, and in general, any other banking solutions.
In the Russian Federation, in accordance with the recommendations of the Central Bank, there are several requirements for the information security of banks, for example, such as compliance with the level of trust (OUD4), requirements for conducting constant penetration tests and other regulations. It is extremely important for software companies for banks and other financial institutions not only to ensure compliance with these requirements, but also to implement such a process of developing their software so that it eliminates the possibility of vulnerabilities, critical errors, or third-party interference in the development process.
In other words, it is very important to structure the development process so that it meets the criteria for safe development. Development companies, as a rule, build a safe pipeline – it includes differentiation of access to source code, safe assembly and delivery of software, when outside interference is excluded, the source of any changes in the created product is checked. During the assembly process, multi-level automatic testing takes place, which allows to identify both possible errors and potential security problems. The software undergoes mandatory automatic analysis for vulnerabilities (static analysis, library analysis, dynamic vulnerability analysis), automatic testing for compliance with OUD4 requirements, and only after that the assembled distributions can be shipped to a test bench or customer.
Additionally, after deploying the software on the stand, a periodic dynamic analysis of the software is carried out by various scanners, either by information security departments, or by third-party auditors or even specially involved teams of so-called “white hackers.”
The final goal of such events is a multi-level check that eliminates the appearance of errors and vulnerabilities in the software of the entire ecosystem built on the BaaS platform.
Conclusion
Over the past two decades, the world already has all the prerequisites for creating fundamentally new banking institutions and payment solutions. With the advent of the Internet, smartphones and ubiquitous high-speed mobile communications, banks and a variety of payment tools have become available, as they say, “in the palm of your hand,” and users need literally “one finger” to conduct transactions and have funds in their digital bank account.
Neobanks and full-fledged digital banks have appeared on the markets, without classic offices, without unnecessary bureaucracy and the legacy of old archaic software, flexible, modern, open to the latest technologies.
In addition to purely banking organizations, players from other sectors of the economy also claim the share of the financial market: IT business, telecom industry, e-commerce, etc., which can start as soon as possible by using the Bank-as-a-Service platform as the main engine for automating transactions and connecting any fintech solutions via API to a digital bank. Those companies that are in no hurry to implement the most advanced solutions in the digital financial world risk losing their once stable positions forever, and in the near future.
Authors: Frolov Vladimir Nikolaevich, doctor econ. sci., Professor,
Romanchuk Alexey Petrovich,
Dorofeev Andrey Viktorovich