We recently launched our first eBook for subscribers, “2021 BaaS Guide”, which covers the three models in banking partnerships and resources in comparing providers. Each founder or product team will have unique needs based on target users and platform goals, but there common points to understand in evaluating bank partnerships.

One of the discussion points in the guide centered on criteria that companies should account for in launching a financial services product. If a vendor or bank partner lacks a specific capability, the platform will need to find a 3rd-party solution or build out the function in-house. The theme of total cost of ownership (TCO) comes in to play quickly — fintechs must include not only vendor/partner recurring costs, but also program management (e.g. onboarding, compliance, audits, end-user support, platform support, etc.) and other fees. Unfortunately, teams anchor most of their decision on a partnership starting costs (see section below).

Anchoring Decision on Cost

The majority of decision-making (especially for early-stage startups) is anchored on initial cost.  Funding is usually limited for new companies with unproven track records, unknown business models, or no actual users.  The chicken-and-the-egg challenge founders face with investors: funding needed for market validation (founder) VS. market validation needed for funding (investor).

Companies need to be aware of the total cost of ownership in launching financial services -- regardless of partner model (payment processor, direct-to-bank, or Banking-as-a-Service).  Monthly program costs, user/transaction fees, reserve amounts for losses, and customer acquisition costs should be detailed in first year financial models.  Firms need to be able to commit $500K+ (based on use case) over the course of the first year towards a sustainable launch.  Programs with card issuance or lending require higher commitments due to complexity.

Platforms that are looking for a transaction-only, deferred payment, or discounted model can end up with an under-performing vendor program. The lack of compliance and program management expertise needed may impact the user experience and platform stability.  Providers that offer low-cost structures avoid measuring risk and fraud, and shut down apps they are no longer comfortable with due to legal or compliance concerns. Fintechs would need to add other vendors for a complete solution (i.e. payment processor, KYC vendor, bank data aggregator, prepaid card provider) and manage 4+ relationships. BaaS partners would include all these functions in-house in one package (we cover the differences on structure in detail our BaaS ebook).

What are the key areas for platforms to be aware in launching financial services offering? We cover the top areas below that need to be managed (either by a vendor, partner, bank, or themselves) towards launching a platform.  After reviewing the list you say, “we’re not close to figuring this level of detail.” For early stage teams just starting their diligence, that makes sense. For those firms ready to decide in the next 90 days, lack of oversight here can lead to penalties, losses, business closure, and reputational risk for an organization.  Having a full (early) picture of what’s needed and critical for success is our goal here.

TOP 10 Criteria in Reviewing Banking Partnerships

• Front-end customer relationship: Platforms must choose to own the customer experience (CX) -- designing and managing how end-users interact with their solution.  This can’t be delegated to the same vendor or partner that’s providing a white-label back-end structure.  CX is an important way for platforms to have value-added differentiation against competitors who are using a similar API infrastructure for banking.

• Defined product scope: Lack of product definition leads to poor solution design and ultimately costly updates later in the implementation process.  It’s best for both platform and partner that this is clarified as early as possible.  If there is only a general review taking place, then prospects should be asking for resources and materials to review until they’re ready to have product-specific discussions and make a buying decision.

• Total cost of ownership (TCO): TCO is often poorly communicated or researched based on the different options and comparison points in choosing a solution.  Prospective clients are misled into looking only at contract costs and not additional program costs for KYC, account aggregation, card printing, end-user disputes, return fees, fraud support, reserves, etc.  While some partners provide transparency on TCO, many focus on being the lowest cost alternative on paper -- allowing platforms to be shocked later about missing functions needed to go live.

• Projected user growth and monthly activity (revenue): Estimates may be difficult to measure for new offerings, but can help define early partner fit in economic models -- especially for platforms who need a transaction only cost model versus fixed monthly fees, or 2-3 months before gaining traction with users.

• Timing (to start integration, get launched): Certain partnerships take 3-6 months and otherscan be over a year in implementation and product launch.  Platforms with specific timeframes to be live must account for this in their decision.  Vendors are the fastest due to the minimum capabilities they support, followed by BaaS partners, then banks.

• Compliance program: Most partner banks don’t have integrated compliance support (KYC, AML, audits).  Based on a platform’s use case and product, an outside vendor may need to be added for user onboarding and screening.  Founders should compare providers that include compliance versus having another 3rd party to connect with.

• Platform support from partner/vendor: Banking providers may utilize self-service models or encourage platforms to have an internal program manager to maneuver between bank, payment processor, card, and compliance teams.  If a provider does include dedicated support, there would be an additional (or higher) monthly cost.

• End-user support: Most platforms plan to own the complete customer experience in-house, especially customer support.  While general app inquiries for customer support are typically fine, requests to handle fraudulent claims and provisional credit should be handled by an audited end-user support firm.  There are regulatory requirements for mishandling certain inquiries (such as Reg E claims), which can result in customer complaints to regulators.

• Legal review (from outside council): New models in payments, custody, and lending that deviate from current norms should be reviewed thoroughly against state / federal guidelines.  Bank partners are less likely to allow these newer models without a proper legal compliance review.  Sweepstakes models, prize-linked savings, cash advances, unsecured credit all exist in the market but lack standard acceptance -- a legal opinion may be needed.

• Future product roadmap: Launching a minimum viable product (MVP) is the short-term focus.  However, in today’s banking landscape, most customers expect added more functionality and new features to be added soon.  Vendor relationships help address immediate MVP needs, but lack depth towards Phase 2 goals.  The trend for platforms in their fintech product roadmap is: 

Payments → user account 

User account with card → full bank account w/ card 

Full banking w/ card →  lending add-on

Most vendor and partner solutions have a handle on payments and some user account structure.  Providing full banking functionality (e.g. direct deposit, bill pay, round-ups, wires, remote deposit capture) and debit cards is a big step-up.   This requires a bank partner on the bank-end (either in a direct-to-bank partnership OR through a BaaS provider who plugs in a bank).  

Since lending is even more complex due to state-by-state laws and capital requirements, platforms typically focus on this last.  For companies that choose to start with lending, they usually start with a secured credit card or loan offering in which the end-user puts up a deposit as collateral.  The monthly payments from the user are reported to the credit bureau to improve a customer’s credit history.

There’s a supplemental checklist in the Appendix of the eBook to help gather most of the necessary due diligence from bank partners during first calls.

As mentioned earlier, not all teams may have every component figured out in the beginning.  Platforms tend to iterate their high-level use case after speaking with a couple providers about what’s possible or performing some preliminary research on their own.  Changes in the market and new competitors may also alter final details of their MVP.

What’s most important is having an educated and impactful dialogue with potential providers.  These initial discovery calls should be focused on platforms sharing specifics of their use case AND bank partners discussing details on launching products (‘the how’) -- not educating buyers on ‘what’ they do in the industry. 

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