FinTech Infrastructure in Banking Programs
Banking-as-a-Service (aka BaaS) is a fast growing sector in FinTech that allows any company to offer their customer a financial service or product (i.e. payments, wallets, deposit accounts, cards, credit, cryptocurrency). New market entrants promise speed to market, easy to use APIs (or application programming interfaces) for banking, and low costs to start. Innovation may now allow for an optimized and efficient launch of banking services (in a few months instead of over a year), but complexities still exist in combining all the pieces together into one stack.
For companies that have worked directly with banks, the painpoints hover on slow (and uncertain) approval processes, building core banking systems on top of banks, and juggling multiple vendor relationships (i.e. tech provider, KYC vendor, processor, card network, etc.). The value from BaaS partnerships is in directly taking on most of this responsibility on behalf of companies, in a transparent and rapid process of approval, testing, and launch. Not all Banking-as-a-Service firms provide the same amount of coverage and support in each layer of the infrastructure stack.
Before diving in and exploring each component, each company (or platform) actively comparing a banking partnership model or program should have a few items identified on their side.
KEY CONSIDERATIONS before exploring a banking stack
The needs, goals, and target users of a platform can vary widely — even within the same vertical or industry sector. In the journey of evaluating programs and providers, platforms can also change their approach to product initiative.
It makes sense to have a clear grasp on the following pillars, which impact what a company needs in their infrastructure partner:
Platform vision/value: This “north star” helps keeps all product, feature, and program choices aligned.
EXAMPLE: Financial wellness platform providing immigrants to the US access to personal credit.
Product scope that fits with vision: Specific product with features that deliver on the overarching goal of a company;
EXAMPLE: Credit-builder loans and secured credit cards will be offered to recent immigrants that lack any credit history, in order to build a credit profile and qualify for standard credit products in the future."
Differentiation & value drivers: Different platforms can have similar visions and product scopes, but what separates each one is their approach to acquiring and serving the consumer or business user. Value drivers exist in user experience, complementary resources provided, and the ability to save time or increase earnings/rewards.
EXAMPLE: As part of using the credit building products, this financial wellness platform helps immigrants qualify for renting an apartment, waives the security deposit, and automatically reports rent payments monthly.
Monetization plan: Being specific in estimating revenue streams on a monthly basis, down to the individual user is critical. Platforms can charge monthly subscription fees, earn referral fees from affiliate partners, interchange revenue (if they’re issuing a card to users), loan interest (on credit cards or loans), and deposit interest (based on user balances).
EXAMPLE: The secured credit card passes interchange revenue (from customer spend) monthly to the financial wellness platform. There’s also a premium subscription fee for credit-builder loan clients who opt in to the rent qualification and reporting program.
Resources needed (funding, staffing, expertise, development): Launching banking services (direct with a bank or through BaaS) requires investment of capital and staffing to get started. Partnership models don’t cover front-end development (e.g. banking app). Based on program complexity and timing to launch, platforms may need subject matter experts (e.g. compliance or legal) and a larger team for initial development and implementation.
Risk appetite: This area quickly impacts user onboarding and KYC (Know Your Customer), specifically with personal information that a user is required to submit in order to qualify for a new account. For platforms that want to minimize the info requested, there’s a higher risk of allowing fraudulent users (which can lead to losses). Moderate risk appetites help balance KYC requirements and conduct necessary screening to deter bad actors.
Overall, the list above funnels into the top decision factors (or priorities) of platform in choosing a partnership model or provider. Suite of products, speed to market, ease of integration, and cost rank highest. Within cost, there’s an important distinction to make regarding total cost of ownership (TCO). Many of the newest BaaS options list low monthly fees, but these programs don’t include key compliance or program management functions (see items in the next section).
More importantly, managing the bank partner relationship isn’t included — platforms must directly negotiate with a bank, sign a separate agreement, gain the bank’s approval throughout implementation, and fulfill reporting requests on user or platform activity. Companies would need to hire for a program manager or banking operations lead to be the point of contact with the partner bank. This added cost isn’t necessary for BaaS programs with built-in bank management.
LAYERS IN BANKING INFRASTRUCTURE
What does the banking stack entail? Here’s a list of the critical that BaaS partner, vendor, or platform needs to provide in launching and maintaining a banking services offering:
Bank partner: The foundational piece in all banking programs, banks provides the licensing needed to create FDIC-insured accounts, hold deposits, facilitate payments, issue cards, and lending. The majority of partner banks act as the licensing placeholder only and don’t provide additional support through existing channels or divisions.
Top Players: Evolve Bank & Trust, Sutton Bank, GreenDot, Bancorp, CrossRiver Bank, WebBank, Silvergate;
Core banking infrastructure: Banks have legacy systems in place that make it difficult to allow the latest in financial technology. Therefore, partner banks recommend specific tech providers to build a banking core OR allow BaaS partners to directly integrate their banking stack to serve fintech companies.
Top BaaS providers: SynapseFi, Cambr, Railsbank, TreasuryPrime, MBanq, Fidor, Bankable, Sila, Unit;
Front-end user experience: Most platforms plan to own the user experience, which starts with the app or website (front-end portal) where a user signs in. Both banks and BaaS providers don’t offer front-end as part of their program. they may recommend dev shops they’ve worked well with in the past. Companies can also choose to do this in-house or modify their existing app for the banking services offering.
Compliance and risk program: Platforms can mistakenly assume this is provided by the bank partner. However, KYC vendors and compliance program managers must come from either the platform, vendors, or BaaS firms. Many reputable risk vendors exist with areas of expertise, but few provide an all-inclusive risk program. The BaaS partners who do provide level of scope have already pre-approved their program with the bank, which increases speed-to-market.
Top specialized vendors in RegTech: Jumio, Socure, Kount, Alloy, Au10tix, Beam Solutions, IDNow, Trulioo;
Account opening and maintenance: There’s so much granularity in this area — requirements to open an account, time it takes to approve account opening, minimizing pending review, servicing account holders. The account opening piece is tablestakes, but providing a real-time balance, transaction history, blocking a card, and disputing transactions are all critical. Some banks and BaaS providers may lack the APIs to support these requests and push this on the platform to build out themselves.
Banking connector (aka account aggregation): Think of Plaid or Yodlee and their ability to create a link to an external bank account (i.e. at Chase, Bank of America) that provides banking details verification, account balance, and transaction history. This link can be used to facilitate ACH transfers (in or out) to a platform’s app. This functionality is mostly outsourced, but many partnership models have established relationships with vendors. As a backup when outside banks don’t allow for aggregation, microdeposits (e.g. transferring and verifying of small transactions) is still available from some providers.
Top aggregators: Plaid, MX, Yodlee, Tink, Saltedge, TrueLayer, Finicity;
Payment processing: Platforms typically have access to ACH and domestic wires through banks or BaaS partners. Additional payment rails (such as card processing, checks, international wires, crypto) would need to come from vendors. Very few banking partnerships provide a full suite of payments as part of their in-house program. The demand from users for all available paths puts pressure on platforms to include these capabilities from Day 1.
Top payment-only processors: Stripe, Dwolla, Braintree, Adyen;
Card issuance and printing: A few of the well-known BaaS solutions are more of a pure (prepaid) card program with added banking functionality. These providers have solid experience with card issuance, but not through a user deposit account (likely an omnibus or FBO, ‘for benefit of’ structure) — customers won’t be able to receive direct deposit or external bank transfers (via ACH or the card network). Card printers are outsourced vendors, but are already integrated with BaaS in order to personalize cards for new and existing users.
Top pure card players: Galileo, Stripe, Marqeta, Deserve;
End-user support: Bank partnerships don’t included complete, end-to-end customer support. Most platforms would rather own this piece as part of their user experience and build out a team. However, there are certain card-related service inquiries (such as disputes and chargeback processing) that require agents to be certified to confirm adherence to regulatory requirements (such as Reg E and EFTA). Numerous on-shore and off-shore options exist with varying levels of expertise in banking.
Other (fraud management, rewards, affiliate partnerships, data insights, underwriting & credit scoring): Dependent on the use case and product scope, other custom functions may need to be added which aren’t a part of standard BaaS partnerships. All platforms offering banking services should strongly consider a fraud management vendor for transaction monitoring and mitigating losses. Companies launching cards are interested in unique rewards for users — this can be through travel experiences, cryptocurrency, cashback, or stock options that require a 3rd party relationship with a separate vendor. Credit offerings can also have custom underwriting and scoring that relies on alternative data sources not available through banks or BaaS.
COMBINING FRAGMENTS TOWARDS A COMPLETE PROGRAM
The financial services industry has a history built on piecing together components. The mergers and acquisitions from the 70s - 90s saw large national institutions continuously acquire regional and community banks. The systems and infrastructure in place remain unchanged despite the increase in customer volume and new products being added.
FinTech optimized the speed, efficiency, and access towards launching new programs. However, there’s no all-encompassing standard package that includes every necessary feature and capability (i.e. front-end, back-end, compliance, licensing, program management, customer support, fraud prevention). Certain BaaS providers are pushing towards covering at least 80% of the load, but the fixed program costs can be prohibitive for early stage startups looking to prototype an MVP.
The industry trend is towards further optimization and bundling of fragments that make a whole. In the short-term, this still points to 5+ vendors, a bank partner, and a tech provider. In the long-term, established BaaS programs are building more of the stack in-house and reducing the reliance on 3rd parties. This leads to a lower total cost of ownership over time AND less staffing needed from platforms to manage a complete banking relationship.
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