Ahon Sarkar, GM Helix by Q2, on how banks find their place in embedded finance

With the financial ecosystem opening up, embedded finance has become a buzzword – an emerging trend that's seldom been out of the spotlight and continues to drive billions in investments.

The embedded finance market is predicted to be worth USD 7.2 trillion by 2030, which is in large part because it enables the union of brands with relevant banks to come up with financial products that add greater value to businesses' and customers' experiences.

One platform that is looking into the future of tailored banking is Helix by Q2. Put into orbit in February 2022, Helix is the Banking-as-a-Service platform of Q2 Holdings, a provider of digital transformation solutions for the banking and lending sector.

While Q2’s digital banking platform is focused on serving the needs of banks and credit unions, Helix is a cloud-native core that enables banks, credit unions, fintechs, and consumer brands to embed banking into their ecosystems.

I spoke with the GM of Helix, Ahon Sarkar, on the problems that Helix is addressing by "making finance human", and the strategies banks can adopt to serve as better partners in the embedded finance ecosystem.

How do banks find their place in embedded finance? What strategies should they adopt when exposing their services to third parties, and what are the risks/gaps involved?

Ahon Sarkar: First of all, both are good questions. I think the first question that banks have to ask themselves is to look inwards, and say, who am I and what am I good at? Because the reality is that there are lots of different roles that a bank can play in an embedded finance model. But not every role is right for every bank. It's kind of dependent on what its core competency is and where the bank wants to invest its time and resources. 

I'll start with the first question, which is what kind of things banks can focus on. And then I'll go on to how you pass that expertise on different decks. From a role and responsibility perspective, I'm going to give four different flavors in increasing complexity that you can take on if you want to enter the embedded finance world. 

The simplest thing that a bank can do is just accept deposits from these types of programs and use them to grow your business. So there are these businesses called deposit networks, I used to work at one. And basically what they do is, they take deposits from fintechs, or other sources, and push them across hundreds of banks in the country. So if a bank is good at local relationships or local lending, etc., it should probably just stick with taking deposits. The next most basic thing a bank can do is facilitate a service. For example, if a bank facilitates international remittance, there are companies like Currencycloud that will offer the bank to be a bank of record for them, and they can use it to remit those international payments. Hence, the second thing will be these specialized services that leverage a bank’s existing core competency. The third is what I will call a bank of record. This means a bank is going to be behind a fintech name that will help them build, launch, and maintain their program. There's a lot more involvement – like a bank should have a BSA/AML compliance team, and focus on this kind of white-label embedded finance business. This is the option, I would say, where a bank is truly powering embedded finance, as opposed to playing a piece of it. Today, as opposed to five years ago, more and more brands, in particular, are looking for a bank that will take on a lot of the operational management of the program. They want to launch a banking product, but they don't want to do all the backend work, they just want to launch the product, create the marketing and be the brand. And so, there are banks out there like Bancorp or like big mobile technologies, etc., who do what's called program management for the client. In the context of embedded finance, program management is effectively managing the fraud, all of the backend rules, and the parameters of the program, so that the client can build a sustainable business. 

In terms of expertise, first and foremost, different companies will require a different amount of help and advice. That advice typically ranges across a number of areas. The most obvious one revolves around compliance and regulation. It's really important when launching a banking product to understand things like BSA/AML, CIP policies – sort of the laundry list of things that a company needs to understand in order to step into financial services, as well as understanding what they can and can't include, from a marketing and product perspective.

The reason that we have never had an incident like Robinhood is because we take this step very seriously. We don't let anything get launched until it's gone through all of those stages and reviews. The next step is about product advice – what types of products are successful or are unsuccessful. Not every bank is going to be able to give this advice, the company offering embedded finance solutions should have done white-label programs before to have empathy for the types of problems that they are trying to solve. And then there's the services side, like managed services, which is contact center, dispute management, and then program management, which is the operational running of the program.

What are the top 3 qualities that should be considered when choosing an embedded finance partner?

Ahon Sarkar: Great question. I would say, first, alignment on the company’s product division. The second thing is a sense of partnership, where it feels like you'll be able to deal with ambiguity. What I mean by that is, that there is no fixed playbook, especially for us, because we launch unique products – we don't launch cookie cutters, like rinse and repeat products, so every venture is a new adventure. What we're betting on is not that our partner has done this specific adventure before, but if we and our partner can work together to solve problems when they pop up – just like a marriage. So how do we know if we're going to have that conversation? Typically, what we want to understand in the early parts of the process is how the bank responds to challenges. How flexible is the bank and willing to innovate in that regard? Because if a bank is deeply conservative and unwilling to budge, we may be stuck to a pretty fixed playbook while facing ambiguous challenges. The third thing that is a lot more relevant for a banking-as-a-service partnership, is to make sure to have a sustainable foundation of economics at the beginning, which goes both ways. Because we have seen deals where the bank got nothing or got very little, which creates tension. The bank feels it's not getting its fair share, resulting in not approving stuff, and not being able to work through things. On the flip side, we've seen paradigms where the bank wants to charge for everything under the sun, which means that the program itself doesn't want to grow. Because the more it grows, the more it takes on in costs.

Even though it's sometimes an uncomfortable conversation upfront, it is really important to talk about economics – how the economics are going to be split and how it will change over time.

How is embedded finance changing the payments system at large?

Ahon Sarkar: I would say for sure it is changing payments. Payments is transferring value from one place to another. Historically, payments have lived exclusively between banks – and by and large, transactions are made via a credit card or debit card, through an acceptance terminal into a business. Now, what's happening is that non-banks are able to issue those types of cards, and create unique payment experiences. For example, we recently released user-level card controls – through this, we gave our partners the granular flexibility to design payment experiences around each person. If I have an account owned by a seller, and an account owned by the buyer like in Etsy, I have two options – I can either do the normal thing of taking a credit card and pay two and a half percent of that transaction for the credit card, or I can say, wait a minute, why don't I just transfer money from one person to the other and spend half a percent or a percent, giving all the protections similar to a credit card. Even if let's say 1% of people ultimately try and defraud the system, that may be a loss, but I'm saving 1% on every single payment that ever happens between my sellers who have an account and my buyers who have an account. That is paradigm-shifting. I don't think you've seen that yet. 

Because today, the business accounts that exist are highly manual and painful to use, and only the consumer wallet side of the equation is in the spotlight when we talk about ease. We'll be launching business accounts in the near future. That is exactly the reason why we're launching it, because whether it's Etsy or it's Amazon, or it's Airbnb, there are all these marketplaces where individuals interact with sellers and vice versa, and both the parties face problems. These major marketplaces, which are paying hundreds of millions of dollars a year in credit card or debit card fees, have a real opportunity to change the payment paradigm, I think. So the net use of debit and credit cards is changing. 

In the future, I think we're gonna see the marketplaces create their own internal forms of payment, that circumvent even those traditional rails and create more optionality for consumers with typically better rates.

Why would consumers accept financial products from non-banks?

Ahon Sarkar: I'm a pretty cynical guy – and what I mean by that is, if you don't give me a reason to use your product, I don't care. You know, if you came to me today, and say, "Would you like a purple bank account? I see you have a blue one." I won't bat an eyelid. So what it comes down to is, can you give me something better than what I have right now? That's one of the reasons why we focus on personalization, because traditional banks are stuck using legacy technology that can't be personalized by an individual. So we arm fintech companies with the ability to help people get a better product. 

The second point is, when you embed banking inside of an existing business, there are synergies that cannot make it a bank. So it is the combination of what the company already does, and adding banking creates something new that nobody else has, which incentivizes consumers. 

Thirdly, and finally, it comes down to giving value back to the customer. So in the case of Etsy’s example, why would I actually use that account? I would only use it if I got compelling Etsy rewards or some kind of moment of delight. The same is the case when you look at our current clients, Credit Karma, Acorns, Betterment, Rocket Money, etc. Each of these has something distinct to offer. This is something that we focus on a lot when we partner with clients – what is the unique quality that you can bring to the table? And how do you use what you've already done as a business to make that thing really difficult to replicate? So I don't think just because you launch it, someone's gonna adopt it. I also don't think it's a guarantee that consumers will come, but they will come if you create differentiation and if a company creates unique value for that consumer through personalization, which traditional banks can’t do.

What are the challenges involved in implementing embedded finance strategies?

Ahon Sarkar: I would say it's a business, not a feature – that's the thing that many people forget. People look at Stripe and think they can add payment acceptance in five days and once it is added, now it is there forever, and nothing else needs to be done. Banking is a business. Once a banking product is launched, you are now in the banking business. Just know, if a company is doing it, they should be in this for the long haul – and to win, not just for the sake of launching. That's probably the biggest misconception that I come across. If done right, this will continue to grow and become a bigger part of the business.

The other thing is, the company should think, what is my strategy, and how am I going to survive for the long haul? How am I going to practically differentiate so nobody can copy me and I don't go out of business? The companies that don't think about that are going to make short-sighted decisions that lose them money, take up resources and time, and ultimately don't result in anything – which is why we focus so much on a small number of companies that can do those things at scale, as opposed to trying to sign hundreds and hundreds of companies that are testing out embedded finance and launching it as a feature. We try to find somebody who's going to grow and serve the American population – and eventually the global population.

What is next in embedded finance and the next big fintech trend that could disrupt the financial ecosystem?

Ahon Sarkar: I'll give one answer involving embedded finance, and one outside of embedded finance. The former is going to be business accounts. Currently, business accounts still suck, and that's at a time when more small businesses are created than ever before on a monthly basis. When more of those businesses are micro-businesses run by one person, and they need help running it, there's a massive opportunity to serve by brands that are already selling the types of goods that they're selling, but they need the infrastructure to get better first. So that's why we're focused on business accounts – we'll see us launch that and I think that's going to be a trend coming out. 

The non-embedded finance one will be the evolution of the identity. The concept of identity is changing. At the end of the day, the identity, much like the product, should be built around the person, where every attribute is around that individual. I should own my identity, and once it's been validated, I should be able to show anybody that validation, so that I don't have to redo it every single time and the company does not pay a ton of cost. Also, potentially, I even get a slice of the pie. But I think that will take time, and it will also require more and more companies to launch things like banking, because they have to use this identity over and over again across different contexts. But if we do that, I think we'll get a world in which consumers own and get access to their data, and potentially get compensated for it – because of which the cost to bring on a consumer will go down. And most importantly, fraud losses would go down dramatically, because you get a better understanding of who is who they say they are and who's not, and how you validate that. So that would be the next thing that I think no one is seeing right now, which might take probably 12 to 24 months to really come out into the market – but we're seeing some pretty interesting initial signals.