As the market for embedded finance solutions grows, the key players and alliances are shifting. Q2 is dissolving its partnership with StoneCastle, which spawned Cambr — a banking as a service joint venture between the digital banking software firm and the deposit network.
Going forward, Q2, which has its own core banking technology that powers onboarding, deposit processing, debit card, and payment solutions for clients like Acorns and Credit Karma, will operate under the Q2 BaaS brand.
At the end of 2019, Q2 had dozens of fintech clients on its CorePro platform, accounting for more than 5 million end users.
“We see this as a moment where we’re signifying our commitment and belief in the BaaS opportunity. Nothing has fundamentally changed in the way we’re serving customers or the solutions we’re bringing,” said Jonathan Price, Q2’s svp of emerging businesses, corporate and business development. For existing customers, the two firms will continue to work together.
What has changed is that Q2 isn’t locked in to a partnership that saw StoneCastle playing the exclusive role of deposit network in each deal that was inked. “It creates optionality in terms of what makes the most sense to our clients,” he said. Q2 may choose to work together with StoneCastle in the future.
Q2 has hired the lead generation and sales professionals from Cambr and the team started working for its new employer last week.
“Our goal has always been to put the business model of banking on to an API. Over time, we found that the exclusivity and significant rev share with StoneCastle wasn’t required to achieve that objective,” said Price.
Price, who spent his career as an investment banker, thinks a lot about Q2’s future. The Austin-based company has a history of being acquisitive, so it isn’t surprising the company hired a banker to run corporate development. Price also runs an emerging business unit that encompasses Q2’s partnership model and M&A activity, and includes the incubated startups inside the financial software firm.
“These startups aren’t necessarily the entities we’ve acquired — though we did acquire Open in 2015.” he said. “They are the businesses that have built a fundamental premise around the fintech space.”
Q2 was built around the financial institution, he explained. Q2 has a lot of experience serving traditional banks and credit unions. But on the fintech side, there is another set of constituents. Q2 put these new components into its emerging businesses unit because they have a common theme: they are all heavily focused on the fintech market. As they scale, Q2 sought direct leadership for a business of that scale.
“Q2 is a $350 million top -ine business if you take just the platform business,” he said. “It’s mature, we’ve been doing it 15 years. We needed a different lens about how to build a startup.”
Price is optimistic about the Banking as a Service opportunity. To date, Q2’s work in the embedded finance space has been focused on Tier 1 fintech firms, like Credit Karma, Acorns and Betterment, to provide them with tech and infrastructure they need to bring digital banking solutions to their growing userbases.
Price points to its growing ecosystem of partner banks as one of the pieces of Q2’s value proposition to large fintechs considering launching banking services. Q2 sees itself as running point, helping fintechs work with the right banks, and helping partner banks — which have traditionally been smaller, regional banks — scale up to fintech demands. These banks are essentially spinning up new organizations, designed to support and grow alongside their fintech clients.
“We may take a traditional bank live with 25k or 50k users.,” he said. “Now, all of a sudden, you’re a small community bank and you’re working with Credit Karma or Square or Betterment and you’re taking hundreds of thousands or millions of users live in a very short amount of time.”
Going forward, Q2 plans to get wider with the applications of its BaaS platform, moving outside of fintech. Early direct deposit is a growing field for software and services firms in a variety of different industries and this functionality can easily find a home in solutions that serve the gig economy, self-employed workers, and small businesses. In terms of financial industries Q2 plans to serve in the future, Price mentions insurance, real estate, affiliate banking and brokerage — all which have precedent for launching banking solutions.
Q2 will continue to invest in its BaaS platform in what Price calls “table stakes that can’t fail” — things like onboarding, fraud, and compliance.
“The industry has seen what happens when a banking platform goes down.”