The Next Waves in US Banking - Part 3: Using BaaS to Issue Credit Cards

In Part 2 of this blog series, we discussed the threats and opportunities banks face with embedded finance’s rapid growth. It is difficult for a smaller bank to know how to participate. Perhaps a good starting point would be to leverage the underlying embedded finance infrastructure, BaaS (Banking as a Service), to offer new services. This article gives an example of how this might work.

An area that can be particularly challenging for a smaller bank is the issuance of credit cards, both consumer and business. Typically, this is done by co-branding a card issued by a larger financial institution. However, this really makes the smaller bank a marketing engine for the larger one, with just a small revenue share as economic incentive. True, offering card services is a prerequisite for a full service bank, but cobranded cards lack the ability to deliver a differentiated product, and quite a lot of revenue is being left on the table. Wouldn’t it be great to be able to issue your own card? Wouldn’t this be a better way to profitably utilize the balance sheet and diversify the credit portfolio?

The Problem: Card Issuance is Complex

The reason most smaller banks don’t take this route is the complexity of the card infrastructure, and related compliance requirements. There are many different players, each with their own agreements, interfaces, protocols, and testing requirements. Integrating all this into what may be a rather rigid existing banking technology stack is quite intimidating. In reality, building your own full credit card infrastructure in-house is unlikely to be right for many smaller banks.  

For most small banks, your technology team is probably focused primarily on maintaining and upgrading your core and its associated systems. Launching a credit card platform is an entirely different kind of challenge  with large upfront costs and timelines unlikely to be palatable or profitable out of the gate.

Making the Complex Simple

This is where a flexible BaaS platform can be really helpful. It lets a bank build new products using specialized, modern infrastructures that sit outside its own four walls.  Application Program Interfaces (APIs) power real time connectivity to the platform as if it sat inside the bank.  On the assumption that a bank will work with an infrastructure provider, there are several potential partners, including Q2, solarisBank, and Railsbank. For the purpose of this article, which is to give a sense of what it would mean to use a BaaS platform to issue your own credit cards, let’s use Railsbank as an example.

Railsbank is a global BaaS infrastructure company, headquartered in the UK with regional bases throughout the world including California, Singapore, and Munich.  You likely read about it buying Wirecard’s UK business after the scandal last year.  Railsbank’s stated goal is to empower any company to become a FinTech, and its suite of APIs can be used by both non-banks and banks to prototype, build, and scale a host of financial products.

We spoke recently with Dov Marmor, Railsbank’s US COO, to understand their new Credit Card as a Service (CCaaS) offering and how it can benefit smaller banks. Dov was previously head of Green Dot’s BaaS division, and before that headed Currency Cloud’s US operations. So in BaaS terms, Dov is a veteran.

Yes, Cinderella-Bank, You Can Go to the Ball

“The vision of CCaaS was to do for Credit Cards what BaaS did for checking and debit cards.  We build the incredibly complex infrastructure once, hire an expert team to operate it, and offer it ‘as a service’ to any company wanting to create their own unique credit card experience.”

Using the Railsbank BaaS platform, a smaller bank can design the look, feel, and rewards of its credit card to meet the needs of its own customers and brand promise.  The bank can also choose to power its own ‘bank components’ like underwriting, balance sheet, and regulatory.  It can own as much, or as little, as it chooses and Railsbank will do the rest. 

Railsbank does not have its own consumer facing brand and exists entirely to power its B2B customers, ensuring aligned incentives.  It also uses commercial structures designed so that customers retain far more of the upside from interchange, annual fees, and lending.

How Would it Work?

An initial consultation with Railsbank includes technology discussion, credit risk appetite, balance sheet capabilities, and the critical compliance implications of what a smaller bank wants to do. Railsbank offers a suite of plug-and-play API-driven services that smaller banks can implement with their own systems. The complexities of payment schemes, middleware requirements, access to networks and gateways, and compliance with all payment regulations are all taken on by Railsbank. With help from Railsbank specialists, smaller banks can use the Railsbank APIs to connect to the ecosystem and to their mobile and web applications.

Railsbank provides smaller bank clients with the connectivity software for networks and partners, transaction processing software, optional algorithms for underwriting and managing credit lines, and linkage to the card supply chain. They also have specialists in compliance, legal contracts and settlement operations to ensure that their clients can function safely and effectively in the new ecosystem.

Depending upon the level of openness of their core banking platform, and the extent of in-house application development capability, a smaller bank may also need to engage with a company like Plaid, which will complete the interfaces even with traditional cores. (Plaid has just announced it inked a deal with Jack Henry to open up core banking for Jack Henry customers.) The alternative would be to bite the bullet and implement a cloud-based, open-API core like Finastra or Temenos. Obviously, this is a much larger project with much greater long-term benefits.

Selecting the Right Partner

Companies like Railsbank have a vested interest in your success, since they are typically compensated in line with growing your program, rather than large up-front fees. Because of this shared alignment, they can act as a true partner.  Banks still own the relationship with their customers, they continue to bring deep industry knowledge and expertise, and have the added opportunity to deploy the low-cost deposits on their balance sheets into high yield revolving loans.  A strong BaaS partner like Railsbank brings deep technology and financial ecosystem knowledge. Both sides win, which is the nature of a strong partnership. Over time, additional credit products may become part of the capabilities a smaller bank could offer to their customers through the BaaS platform.

In fact, selection of the right partnerships depends very much on your strategic objectives, the nature of your current client base, and your internal capabilities. It also depends upon an understanding of the marketplace and available partnerships.

How to Get Started

The first step may be to engage a specialist consulting firm like Ulysses Partners, to work with you through completion of strategic planning, to specific plans around engaging with embedded finance, and selection of appropriate partners. Once the partnerships are in place, you will find that you have transformed a significant and potentially very profitable part of your business, with sustainable new revenues to replace and add to embattled traditional sources of income.