Fintechs are encroaching on incumbents’ share in the banking game, forcing them to explore new business models — but tech-savvy legacy banks can treat this as an opportunity rather than a threat by moving into the Banking-as-a-Service (BaaS) space.
BaaS platforms enable fintechs and other third parties to connect with banks’ systems via APIs to build banking offerings on top of the providers’ regulated infrastructure. This means banks that launch BaaS platforms can actually benefit from fintechs entering the finance space, as it turns fintechs into customers rather than just competitors. Other benefits from launching a BaaS platform include being able to monetize such platforms, establishing strong relationships with fintechs, getting ahead of the curve in terms of open banking, and accumulating additional data from third parties.
In The Rise of Banking-as-a-Service, Business Insider Intelligence looks at the benefits banks stand to gain by offering BaaS platforms, discusses key players in the industry that have already successfully launched BaaS platforms, and recommends strategies for FIs looking to move into BaaS.
The companies mentioned in this report are: BBVA, Clearbank, 11:FS Foundry, Starling.
Here are some key takeaways from the report:
- Offering BaaS also allows banks to unlock the opportunity presented by open banking, which is becoming a vital part of the financial services industry.
- There are two key types of players — BaaS-focused fintechs and BaaS providers with a retail banking arm — that banks will need to learn from and compete against in the BaaS space.
- Banks that have embraced digital will have an easier time ensuring that their infrastructure and systems are suitable for third parties.
- It’s vital for incumbents to accurately assess third-party needs to create an in-demand portfolio of white-label BaaS products.
In full, the report:
- Outlines what BaaS is and how it relates to open banking.
- Highlights the benefits of launching a BaaS platform, including two different monetization strategies.
- Explains what BaaS players are currently doing in the space, and outlines the services they offer.
- Discusses what incumbent players can do in order to launch their own successful BaaS platform.
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- Visa’s Fast Track program, which allows fintechs to quickly get onto the payment giant’s network, has seen record interest as small companies look to stand up digital-payment capabilities amid the coronavirus pandemic.
- Terry Angelos, global head of fintech at Visa, told Business Insider the program can cut a process that can take over a year down to as short as a few weeks.
- The payment company also stands to benefit from the program, Angelos added, as it looks to tap into $185 trillion worth of payment flows, including $18 trillion in cash, it doesn’t participate in.
- The program includes a network of partners for fintechs to work with — such as Stripe, Marqeta, and Very Good Security — with “best-in-class” commercial agreements already negotiated by Visa.
- Fast Track also allows Visa to recognize major pain points in the fintech community that sometimes lead to investments for its venture capital arm.
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Visa is seeing a surge of interest in a program meant to help fintechs quickly onboard onto the payment giant’s network as companies scramble to setup digital channels for payment in light of the coronavirus pandemic.
Visa’s Fast Track, which was first established in June 2018 for non-US companies before expanding into the US in July 2019, allows companies to build payments stacks quickly. Thanks to a network of providers that cover every facet of the payments space — from card issuing to banking partners to security — onboarding times that could have taken over a year have been cut down to as short as a few weeks.
In less than a year, the Fast Track program has grown 280%, with 140 participating fintechs. However, recent months have seen interest reach record highs as companies scramble to quickly establish digital-payment capabilities, Terry Angelos, global head of fintech at Visa, told Business Insider.
And it’s not just the fintechs that benefit from a faster experience. The more companies Visa brings onto its network, the more transactions it facilitates, meaning more revenue through fees like interchange.
That speaks to Visa’s goal of expanding its reach beyond the $9 trillion in payment flow it already manages. There is $185 trillion worth of flow the company doesn’t participate in today, including $18 trillion of which is done in cash.
And while the program is open to any company that might have a need to integrate with Visa for some type of payment, Angelos sees real potential working on fintechs digitizing cash payments.
“If we just work with fintechs who are converting cash into digital forms of payment, we could double the Visa payment volume,” Angelos said. “We’re very interested in finding and working with fintechs who are converting cash to digital forms of payment.”
Fintechs can partner with the likes of Stripe and Marqeta
If anyone understands the struggles a small company might have navigating a larger organization, it’s Angelos. In 2015 he sold the startup he cofounded and ran, TrialPay, to Visa.
“One of my frustrations was always, ‘How do I get a hold of someone at Visa?'” Angelos said. “It’s a hard thing to do, because often the networks are focused on very large clients. It’s hard for a network to say, ‘Well, who is this company? What’s their use case? Have they launched yet?'”
Fast Track was made to streamline that process, in addition to providing what amounts to essentially a playbook of additional partners needed to standup a payment stack.
Visa offers a network of vetted, tech-enabled companies like Stripe, Marqeta, and Very Good Security that Fast Track fintechs can work with to build new products.
“We’ve put together all of the technology companies that you need to go live,” Angelos said.
“We vet them and we help create a standardized commercial agreement so that fintechs can choose which partner they want to work with and then very quickly get online,” he added.
Fintechs that apply for the program range from those just starting out to others that are adding on new products, Angelos said. Participants include delivery startups like Rappi and cryptocurrency players like Fold.
For startups like Rappi, the Fast Track program helped them add financial services products to their existing on-demand delivery tech. And for players like Fold, it enabled them to offer cards as a core piece of their business models.
Through Fast Track, fintechs also get licensed to issue Visa cards, a process that previously would have required getting in contact with Visa, filling out forms, and navigating the payments giant’s approval processes.
As of last year, the whole program is run online, which has proven even more important amid shelter-in-place conditions.
“We’re seeing the benefits of moving our commercial engagement and commercial agreements online, and our fintechs are responding to that in ways that we think are positive for the ecosystem,” said Angelos.
Fast Track lowers the cost to get started with payments
On top of streamlined access to payments tech, participating fintechs can enter into “best-in-class” commercial deals with Visa, said Angelos.
“If you are issuing a Visa credential and you qualify for the program, this would be the best commercial setup for you,” said Angelos.
By lowering the cost of starting out with Visa, fintechs can experiment with new payments use cases, Angelos said. Fast Track can facilitate a number of use cases, like a neobank rolling out a debit card or a delivery startup adding a digital wallet in its app, for example. And depending on how much support the startup needs, Fast Track can provide technical advice and guidance in addition to the partnerships with other fintechs like Stripe that enable those use cases.
Those that are successful and continue to grow can set up deals with Visa’s partners, though Visa does not dictate the terms of those agreements.
There’s a knock-on effect to that innovation, as it’s not only fintechs that stand to benefit. Visa earns revenue for all the payments that flow through its system, or “rails,” in industry lingo.
“From a Visa standpoint, we’re a net beneficiary,” Angelos said. “If fintechs are successful in finding new payment use cases, many of those flows are on our rails.”
Incumbents are eager to bring fintechs into their ecosystems
Visa isn’t the only incumbent player looking to engage with fintechs. Larger organizations are quickly recognizing the need to cut down on red tape and make it as easy as possible for startups to work with them.
Mastercard’s Accelerate program gives fintechs access to Mastercard’s network and also looks to get startups up and running in payments. And its StartPath program, which functions more like an incubator, offers more in-depth partnership to help startups build their businesses and, in some cases, get funding from Mastercard.
Big banks, have also looked to adjust their processes. JPMorgan cut the time it takes to evaluate a fintech from nine months to three weeks. Morgan Stanley, meanwhile, launched a formal program with venture capital firms to help better prepare fintechs for use cases they are interested in.
Fast Track doesn’t just help fintechs get onto Visa’s platform. The program also represents a way to suss out potential startups worth investing in through the payment giant’s venture capital arm.
Angelos said the program allows Visa to recognize needs in the ecosystem. Visa’s investment in January in data-security startup Very Good Security was an example of that.
Security was a constant stumbling block fintechs in Fast Track were facing. As a result, Angelos said Visa realized VGS fit the very need so many startups were struggling with.
“That came from an understanding and engaging with the fintechs that are in these programs,” he added.
SEE ALSO: JPMorgan slashed how long it takes to test out fintechs from 9 months to 3 weeks with a new process that could save it millions as it looks to buy, invest in, or work with more young companies
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- US stocks rose Friday as positive signs that the economy will reopen soon offset a dismal April jobs report.
- The report showed that the US economy lost a record 20.5 million jobs last month. That pushed the unemployment rate to 14.7%, the highest since the Great Depression.
- First-quarter earnings season continued, and US crude oil prices rose roughly 4%.
- Read more on Business Insider.
US stocks rose Friday as investors looked past a dismal April jobs report to encouraging signs of economic reopening.
The Friday report from the Labor Department showed the US economy lost a record 20.5 million jobs last month amid sweeping lockdowns intended to combat the spread of coronavirus. The unemployment rate surged to 14.7%, the highest since the Great Depression.
“The market has already anticipated this historic fall in the economy by dropping dramatically in late February and most of March and likewise has already anticipated a bottom and bounce from the lows,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.
Here’s where US indexes stood shortly after the 9:30 a.m. ET market open on Friday:
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Investors have been encouraged by signs of a US economic reopening, as some states have started allowing non-essential businesses to go back to work. In addition, positive signals of easing tension from the US-China trade war lifted sentiment.
First-quarter earnings season is still in full swing. Shares of Uber gained 6% on trading Friday following its earnings report Thursday after the bell. The ride-hailing company posted a larger-than-expected loss, but said it could be profitable in 2021.
US crude oil also gained Friday, following a price increase on Thursday from Saudi Arabia and signs that demand is starting to rebound after being crushed by coronavirus. WTI crude rose as much as 6%, to $24.99 per barrel on Friday.
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In Q1 2020, the digital payments titan posted $191 billion in total payment volume (TPV), up 19% annually — representing a steep deceleration from its 25% growth in Q1 2019. This downturn came largely because of the coronavirus pandemic, which drastically reduced consumer spending overall, in turn impacting PayPal’s business.
However, PayPal’s business began to improve starkly in late March and April, when it saw “unprecedented demand,” per CEO Dan Schulman. In an experience that sharply diverges from other payment firms, PayPal saw transactions jump 22% annually in April, garnering $68 billion in TPV — 40% of its Q2 2019 total. And it isn’t stopping, with May 1 marking the largest day in PayPal’s history, per the firm’s earnings call.
As stay-at-home orders and consumer wariness sharply tick up e-commerce usage in all categories, and digital payments grow in other segments, PayPal’s wide reach and large audience are paying off. Further, the brand’s results make a case for other payment firms to double down on e-commerce as much as possible.
Massive customer additions as the economy moved online represented a big bright spot for the firm and likely helped its business improve.
- PayPal added 20.2 million new accounts in Q1 2020. About half of these were a one-time gain from the integration of Honey, which the firm acquired in late 2019. But 10 million is a Q1 record for the firm, contrasting with 9.3 million last Q1. PayPal’s customers had been increasing at a steady pace, but the acceleration amid the pandemic likely comes from a mix of customers hunting for ways to begin paying digitally more easily and merchants migrating to online retail until they can open their doors again.
- And April’s customer gains are positioning the brand for an even stronger Q2 2020. PayPal came close to lapping its organic Q1 2020 gain in April, with an increase of 7.4 million users — up 135% annually — and customers are continuing to join at a rate of 250,000 daily, per the firm. As stay-at-home orders in many states stretch on, and retail reopens as largely curbside business, more sellers are likely looking for ways to offer online payments and more consumers are signing up for ways to make them.
Moving forward, PayPal has numerous opportunities to continue to grow as the pandemic “dramatically” accelerates the shift to digital payments, per Schulman. Even as stay-at-home orders are lifted, we expect e-commerce to stay substantially elevated for awhile. This is good news for PayPal, which can serve merchants turning to online for the first time with its suite of merchant services, as well as for services like Pay with Venmo, which the brand has been looking to expand as a monetization tool.
The pandemic could also propel the brand’s rumored pursuit of in-store payments and open a new line of business: Schulman noted that there’s substantial interest from parties looking for low-contact, affordable ways to pay. If, as we move into the next stage of the pandemic, PayPal can position itself as the top choice for providers looking for easy ways to enable electronic payments, it’ll likely fare better than most in the current climate.
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- The US Treasury Department will auction a 20-year bond in May for the first time since 1986, according to a Wednesday press release.
- The department is reopening the bond and increasing sizes of other issuances as it plans to borrow $3 trillion in the second quarter for rising stimulus costs.
- The Treasury also plans to shift its issuance concentration to longer-dated notes to limit volatility and capitalize on low rates.
- Visit the Business Insider homepage for more stories.
The US Treasury Department will issue a 20-year bond in May for the first time since 1986 to help fund a sharp increase in government spending.
The department announced on Monday it plans to borrow $3 trillion in the second quarter to foot the bill for widespread coronavirus stimulus. The reintroduction of its 20-year note and larger issuances across a range of maturities will shore up more cash to counter the government’s surging deficit.
The Treasury will initially offer $20 billion worth of 20-year notes at a May 20 auction, according to a Wednesday release. Additional 20-year note auctions in June and July are anticipated, with each sale offering $17 billion of notes.
“Over the next quarter, Treasury’s cash balance will likely remain elevated as Treasury seeks to maintain prudent liquidity in light of the size and relative uncertainty of COVID-19-related outflows,” the department said.
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The department first announced it would reopen its 20-year note on January 16 to fund the government’s trillion-dollar deficit. The US budget shortfall has since soared as legislators work to pad the economy from a coronavirus-fueled collapse. The Committee for a Responsible Federal Budget projected on April 13 the deficit will nearly quadruple to $3.8 trillion from $984 billion in 2020 alone.
The Treasury expects to shift its issuance concentration from notes to longer-dated bonds for upcoming sales to better fund mounting debt. Yields remain at historic lows as investors pile into safe havens amid the coronavirus pandemic and all-but-certain recession.
“In light of the substantial increase in borrowing needs, Treasury plans to increase its long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility,” the department said.
Auctions of 3- and 10-year Treasury notes and a sale of 30-year bonds will also take place in May, raising $42 billion, $32 billion, and $22 billion, respectively.
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