In the era of “every company will be a fintech company”, the path for launching financial services can vary widely. The assortment of responsibilities, players, vendor and partnership structures, timelines, and costs is challenging to navigate — especially for firms lacking experience in banking and technology (or FinTech).

Companies in healthcare, payroll, expense management for small business, hubs for paying rent — have all identified a painpoint that can be solved by providing banking services. Core needs of maintaining custody of customer funds, facilitating/managing spend, providing credit, and access to various methods of payments — are being fulfilled now.

After speaking with over 500 platform (from startups to enterprises), here are the top questions and themes being asked by founders and product teams. To capture the necessary context, we divided this topic on two parts — the first listed below and part #2 for the following week.

What banking services can I offer?

Similar to traditional banks, the services delivered by fintech vendors or bank partners are centered on money movement (through payments), custody of funds (with accounts), issuing cards (prepaid/debit/credit), onboarding users, and leveraging data (to link external accounts or view transactions).

• Payments: Multiple payment rails exist: (i) ACH (Automated Clearing House) is most common in the US for bank-to-bank transfers; (ii) Card processing for acquisition (pulling funds from a bank card) or disbursement (aka push-to-card); (iii) wire transfers (domestic or international) for larger or immediate payments; (iv) check issuance and deposit (sending a physical or electronic check, or taking a picture of a check for mobile deposit); and (v) bill payment (such as RPPS or Bill Pay to directly pay utilities or billers). Based on vendor/partner, one or most of these methods are available.

• Data aggregation: View a user’s bank data such as balances, account and routing number, and transaction history; this helps create account links for ACH transfers, validate monthly income, provide budgeting insights, and evaluate a user applying for a loan. Plaid is the current industry leader in accessing bank data.

• Identity verification / KYC: ID can be confirmed by reviewing name, social security number, date of birth, and physical ID against government databases. This review can take place as part of a Know Your Customer (KYC) process (within Anti-Money Laundering programs) in which users are compared against government watchlists. The need for KYC is based on the products/services being offered. Deposit and card programs have some level of KYC to be met before a user is onboarded.

• Accounts: Similar to traditional bank offerings, individuals and businesses can have checking, savings, and loan accounts. Certain bank partner programs allow for using an FBO (For Benefit Only) account at the platform level — all user funds funnel into this omnibus account managed by the platform, who is solely responsible for proper management. Due to money transmitter risk (which requires licensing) and limited functionality, banks and platforms have transitioned away from this account for neobank and card products.

• Cards: Prepaid, debit, or credit card options are widely available. Reward programs and customized features on top of cards are based on the target user segments and created by platforms. Users can receive cash back, crypto, points, or other bonuses based on spend. Most card programs provide monetization to a platform from interchange revenue.

• Lending: Loans (on a one-time or revolving basis), advances (small, non-recourse disbursements), and credit cards (loans attached to cards) are all current options. Most partnership structures require platforms to provide funding for a loan reserve (either through a capital partner or their own funds). There are also secured programs in which a user places a deposit as their credit limit — this secured card is for customers interested in establishing or building credit.

The actual structure and design in launching these services depends on the partnership structure and provider your platform is working with, and the details of your use case.

How are providers different?

Platforms will need to review multiple options between vendors and partnerships, and make a final choice based on the complexity of their product vision, cost, timing, and requirements needed.

Vendors can address simple needs quickly with a minimal set up cost and variable fees based on activity (no contract). For basic needs such as only payments, companies can choose vendors for ACH (i.e. Dwolla) or card processing (i.e. Stripe). Some lightweight prepaid card providers are also categorized as vendors who charge per active card only (such as Galileo Technologies).

The value from vendors comes from speed and minimal cost to get started. While this is ideal at small volumes of payments or users, once a platform starts to scale a vendor can become more costly than a partnership. There’s also no revenue share from vendors — platforms can only upcharge on payments on card access. Users can easily switch to lower cost options at anytime.

Partnerships fit best for platforms with higher volumes of activity and various needs for their initial launch. Banks are part of these programs — either platforms directly integrate with a bank (e.g. direct-to-bank partnership) OR work with a Banking-as-a-Service (BaaS) provider that has built infrastructure on top of a bank.

Top neobanks and challenger banks (such as Chime, Revolut, N26, NuBank) all have financial institutions as partners. Top fintech partner banks are GreenDot, Sutton Bank, Evolve Bank & Trust, Bancorp, WebBank, and NBKC.

Bank partnerships have higher implementation costs and monthly fixed fees is based on banking license, product set, program management, and compliance support is being provided by the bank or BaaS partner. If this additional support isn’t included, platforms must add vendors to fill-in the gaps which increases the total cost of ownership. The benefit comes from numerous revenue streams — deposit interest (on user funds held in accounts) and interchange revenue (from a user’s monthly spend on their card). Companies can also provide their own additional services (such as expense management, budgeting, invoicing) for a monthly subscription fee.

Top BaaS providers include SynapseFi, Railsbank, Galileo, and Q2. New entrants have also emerged in beta — Unit, Treasury Prime, Bond, and Stripe Treasury.

What does my company need to provide (i.e. requirements)?

Outside of choosing a bank or service provider, platforms must still play a part in the user experience, design, funding, and operations of their program.

FRONT-END: Most platforms already have a customer-facing app or site (aka front-end) designed for users. This customer portal continues to be where users set up their profile and interact. Vendors, banks, and BaaS partners are typically white-label providers only — running in the background via API to perform onboarding, screening, and account management. For platforms without a strong front-end, many companies help fintechs and others build this (such as 11:FS, TrueNorth).

TEAM: A team of in-house (or contracted) engineers is required for integration to the back-end service provider. Based on the use case and services, the process for implementation can be a few days or weeks. Many of these vendors/partners share immediate access to their APIs via a testing environment (or sandbox), which helps platforms get hands-on quickly and gauge how much staffing their team needs.

If the vendor or partner of choice lacks program management, companies will also need to hire their own program manager to handle negotiations with vendors, banks, and back-end service providers AND oversee the whole process.

CAPITAL: Payment only services (with transaction-based fees) are the least expensive options, followed by prepaid card vendors (charging up to $5 monthly per card). Some payment firms opt to charge a percentage of volume transferred (with a scale down in the % as volume goes up). Total costs can range from $1K - $5K monthly based on transaction activity.

Working with Banking-as-a-Service providers and bank partners comes with higher total costs due to licensing and ongoing regulatory/compliance requirements. There are initial setup fees during implementation for platforms to get onboarded, approved by a bank, undergo user testing, and go-live. Once a platform gets approved to launch, the use case specifics, program management, and risk scope determine overall costs. Totals costs can range from $150K - $500K+ in the first year based on the banking program, bank partner, and vendors needed.

Will I need to obtain licensing?

The answer can vary by use case details, product scope, and partnership structure. Vendors and bank partners focus on offering programs in which platforms don’t need separate licensing for payments, account opening, or card issuance. Unfortunately, some of these options provided can place platforms (and their partners) in potential regulatory scrutiny. We’ll cover what licenses may be applicable and when they wouldn’t be necessary:

Money Transmitter Licenses (MTLs): Each use case has a flow of funds which lays out how a platform facilitates transactions from multiple parties, with details on account ownership and payment method. In many of these diagrams, an external bank account in the user’s name has funds to be transferred to a platform (e.g. for savings, payment, lending purposes). The account receiving the funds can belong to the original user, platform, or a separate user.

Money transmission takes place when a platform takes custody of funds from User A and then transfers to User B. The platform’s involvement as an intermediary may cause them to be a money transmitter. If the company enabled a direct connection between User A and User B (without taking possession of the funds), then there should be no need for MTLs.

In most neobank, savings, and payment uses cases, platforms can work with bank partners in a program without MTLs. Ultimately, platforms can seek out a legal opinion to make sure they’re in compliance before talking to bank partners.

These licenses are more common with cryptocurrency (in which platforms are custodians) or FBO accounts (‘For Benefit Of Users’) in which platforms use an omnibus account (titled “Platform FBO its Users”). The FBO structure helps onboard users quickly, gather their funds, and perform transactions. This account type may place less burden on asking users for KYC, but open up platforms (and their partners) to possible regulatory inquiries.

Lending licenses: If a platform wants to underwrite, decision, and/or issue loans directly, then they must obtain lending licenses in the states they plan to operate in. The requirements and limits vary from state-to-state and make lending use cases (i.e. credit cards, loans, lines of credit to consumers and businesses) complex to navigate. Restrictions on APRs and fee structures can make certain states not conducive to popular business models.

Platforms can also choose to work with banks and program providers that are licensed. The entire underwriting and decisioning process would be based on this licensed partner. Platforms would be responsible for funding the loan products and providing applicants that fit the scope of the program.

Specialty registrations and licenses: For platforms operating in the investment or securities sectors of financial services, these designations are usually in place as the organization itself gets created. There may be separate requirements of audits or reporting as well. These obligations are all handled by the platform before building a program, with no expectation that a bank or BaaS provider would offer this coverage. Crowdfunding, real estate investment, securities exchanges, and platforms with accredited investors are common use cases that require specialty management and registration.

Do I need to find my own bank?

If a bank partner is needed, programs either have banks built directly in their structure or a list of banks they’ve worked with in the past. If a platform already has their own established bank relationship, they can ask the bank if there’s a Banking-as-a-Service firm they’ve worked with in the past. Most banks still have legacy infrastructure and require a tech provider as a gateway for other companies.

The additional question to be asked is “Do I need to manage the relationship with the bank?” In today’s landscape, most BaaS firms have a hands-off approach when it comes to platforms dealing with banks. A list is provided by the tech partner for a company to choose and apply directly to the bank.

Negotiating with a bank (and launching an approved program) takes additional time, resources, and comes with minimal support. Platforms are on their own in gaining bank approval and maneuvering through roadblocks that pop up. For firms interested in having this direct connection, an extended review would cause delays in getting launched. The experienced BaaS players (active for 3-5 years) have built integrated bank partnerships that manage a smoother approval process on behalf of platforms.

Discussion For PART #2

In our next discussion (Part 2) on top questions asked, we’ll dive into the final half of the top 10 questions:

What is the timing from setup to launch? What is the total cost (of ownership)? Who is responsible for fraud?

Who is responsible for end-user support? What else am I missing?

If you’re looking for additional context on some of these themes, feel free to check out our guide (in the link below) or reach out directly.

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