New to Embedded Banking? Top 10 Questions Asked (Pt.2)
Multiple options and programs exist among vendors and service partners in today’s industry landscape, when it comes to embedded banking. Each has its own set of capabilities, restrictions, requirements, and cost. This makes an ‘apples-to-apples’ comparison difficult for companies exploring providers.
In our previous post on the top 5 inquiries, we covered considerable ground regarding available banking services to offer, differentiation among providers, platform requirements, the need for licensing, and bank partner models. These components directly impact the BUILD and LAUNCH phase for new platforms and their offerings.
How about once your team team is set with their product solution, resources, and partner choice? What other issues come up to be aware? Shifting towards SCALE and EXPAND phases, here’s what’s top of mind for teams:
What is the timing from setup to launch?
The timeline for setup or implementation varies by product solution AND vendor/partner. Use cases with narrow offerings (i.e. only payment processing or data aggregation) can take a few days (or even hours). A single API or SDK is quickly added to an app or website on the back-end. There’s no comprehensive approval process or due diligence review, or bank involvement.
A step up in scope involves issuing accounts either to a platform or its users in order to enable payments/transfers/deposits and custody of balances. A bank partner holds the funds and provides FDIC-insured accounts. Banking-as-a-Service (BaaS) providers facilitate user onboarding, perform Know Your Customer (KYC) & watchlist screening, and build infrastructure to plug into these banks. Depending on the bank and BaaS partner, the structure for deposit solutions can take 6-12 weeks for implementation and go-live. For direct-to-bank partnerships, this can take 4+ months.
An additional layer to accounts comes with card issuance. Most platforms offering deposit accounts to users will provide debit cards to delivers a stickier product (and gain interchange revenue from card spend). The process can take 6-8 weeks and requires approval from card networks, card design, printing of cards, and testing. Platforms interested in virtual cards only (for mobile wallet usage) can save time and cost by avoiding printing. There are also prepaid card vendors that provide a limited, single-use card (without banking functionality) within 2-3 weeks. Complex customization with materials or design would lengthen the process.
Adding other features (such as international users or remittances) and comprehensive use cases (i.e. crypto, lending) can extend the overall timeline further due to additional review and compliance approvals.
What is the total cost (of ownership)?
TCO is also based on use case and vendor/partner choice. Vendors (utilized for limited services such as payments, data aggregation, or KYC) have minimal setup fees and transaction-based pricing (e.g. per payment, per account link, or per user). Prepaid card providers would have a higher setup fee and minimal monthly per card fee (est. $1-5 based on volume), but no fixed cost.
Bank partners and BaaS providers take on more complex use cases involving licenses, regulatory considerations, and compliance reviews of platforms and end-users. Implementation costs (monthly or one-time) not only cover technical integration efforts, but also approval from a bank, marketing and compliance reviews, and testing. These setup fees can start at $5K and increase based on complexity and length of integration.
Once a platform is fully launched, a monthly fixed cost is paid to cover bank license, program structure, and compliance monitoring. If components such as KYC, end-user support, and fraud monitoring aren’t included, platforms would need to supplement these services themselves or with separate vendors (which increases the total cost of ownership). In general, the more vendors used — the higher TCO for a platform launching their banking program.
To offset the higher setup and fixed costs in working with banks, platforms are given revenue share based on their user’s deposit balances and card spend (from interchange for use cases that issue a card). At a high-level, break-even point can come from 1K active users maintaining a $5K deposit balance OR spending $1,000 - $1,500 each month on a card (not including customer acquisition costs).
Who is responsible for fraud?
The platform is responsible for their user’s activities and balances, especially in the case of fraud, chargebacks, and returns. Fraud should be an expectation for all platforms, especially in the first months of going live. Traditional banks and institutions face the same attempts from fraudsters opening new accounts, submitting fake deposits, and frivolously disputing transactions as fraudulent.
Depending on the services provider, there are ways to mitigate against fraud through KYC guidelines, minimizing transaction limits for new users, and confirming funds availability. For ongoing fraud monitoring and prevention, platforms would need to look for vendors such as Jumio, Beam Solutions, Kount, and Ekata.
Who is responsible for end-user support?
Part of delivering user experience, most platforms would like to keep customer touchpoints in-house. Responding to calls, emails, and chats in a timely manner and resolving issues are all critical parts of customer support. Certain customer inquiries have regulatory implications that can lead to customer complaints and penalties against platforms / bank partners. These types of issues (generally related to card inquiries and disputes) may fall under Regulation E and require a response within a few business days, provisional credit, and resolution within 10-60 days.
Platforms planning to own all customer inquiries need to train their support team to respond to claims and undergo an annual audit to ensure ongoing controls are in place. Alternatives exist with onshore and offshore customer service companies that have been certified to handle these requests — per ticket, hourly, or monthly rate pricing would apply. Banks do not lease out their own in-house support and BaaS partners have no capacity to maintain a call center.
What else am I missing?
Besides the pillars we’ve discussed (types of providers, cost of ownership, platform requirements, finding a bank), there are other considerations that also come up:
APIs and documentation: The tech in fintech is the foundational component to evaluate in terms of performance, reliability, and ease of integration. Service providers should have sandbox access readily available for developers and transparent documentation for product teams to follow. Compelling solutions openly provide detailed testing environments and product docs on their site.
Product roadmap: The best long-term partners offer add-on products and services that grow with the needs of users. Most fintech apps evolve in similar paths: payments —> deposits —> card —> lending. Lack of offerings would mean platforms need to add other partners in the future and pay additional setup costs.
Existing clients that are live: Inquire about how many existing fintechs a program currently has, the user volume within platforms, and specific examples. As more providers get added each year, new platforms may be the first to test out their capabilities and receive a poor experience as partners work out the kinks of their product.
Track record: Financial services is a challenging industry with legacy policies, regulation, and innovative models pushing the limits of what’s possible. Approvals from bank partners can be a moving target at times and changes in compliance requirements can be sudden. Existing vendors and BaaS providers with 2+ years of activity have gone through major growing pains and understand what works. Each of these firms has struggled with performance or support issues at some time and should share what they’ve done to improve. The latest vendors and partners still need to build this experience.
TYING IT ALTOGETHER
When it comes to discussions about embedded banking, the best dialogue in meetings come from founders / product leaders with awareness of the landscape AND specific needs of their platform. Non-productive calls lack understanding of providers and result in laundry list of questions to be answered. For these types of inquiries, there are resources and guides to help educate platforms on providers and program structures — our 2021 BaaS Guide is a solid starting point to increase awareness of options.
Regardless of vendor/partner choice, the right context can help all companies make better overall choices in adding financial services.
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