Embedded Briefing: Zeta partners with Mastercard, gears up for US expansion

Under the partnership, Zeta will integrate its technology with various Mastercard capabilities and technologies. Zeta will include Mastercard’s fraud and risk management, transaction enrichment — which is the practice of using AI to extract meaningful information from transaction data —  tokenization, digital issuance, and loyalty services. Zeta will also benefit from getting access to Mastercard’s multiple payment systems.

“Over the course of the partnership, both Zeta and Mastercard look to work with financial institutions to issue tens of millions of credit cards. Zeta has already started collaborating with Mastercard to bring these solutions to customers in the US. We are actively engaging with many of the top US FIs as part of this process,” Bhavin Turakhia, Zeta’s CEO, told Tearsheet. 

The firm refrained from sharing any names at this stage, saying, “We are currently in the process of completing the contracts and agreements with these FIs so unfortunately, we cannot disclose their names yet.”

Zeta runs a cloud-native and API-enabled stack that provides card processing solutions to banks and fintech companies. The firm offers financial service providers technology infrastructure to manage customer payments, deposits and embed offerings from third-party fintech firms.

The firm advertises its ‘Omni stack’ as a quick way to launch credit and loan programs, with APIs running for program definition, account/card provisioning, and management. Without writing any code, clients can use Zeta’s services to launch retail credit cards, commercial cards, charge cards, buy now pay later credit cards, and more. Since its launch in 2015, about 15 million cards have been issued through Zeta’s platform, and it currently processes 30 million transactions a month.

Turakhia believes that the integration of Mastercard’s capabilities across multiple dimensions will support its vision of taking the credit card processing industry to the next stage – from fragmented, multi-vendor systems to compact, single-vendor systems.

“We are shaking up the credit card processing industry, taking it from an age of legacy, fragmented, multi-vendor systems to a cloud-native, 100%-API coverage, microservices-based modern platform,” he said.

Zeta was born out of the realization that there was a lot of redundancy in legacy banking systems. Zeta’s stack encompasses things needed to launch a modern credit card program and uses more modern architecture principles — such as microservices on a cloud-native system that communicate using APIs — this makes the solution composable, customizable and allows banks to rapidly develop their programs.

The firm’s primary focus is credit cards but is soon launching a buy now, pay later capabilities.

“We work closely with banks using our managed services / servicing division to help them conceptualize and take these products to their customers and then provide ongoing operational support if needed,” Turakhia detailed.

According to Turakhia, Zeta helps banks provide a modern experience for their customers. The platform can help boost providers’ cost-to-income ratio and increase net promoter scores. The firm claims that banks can implement and launch new products and programs in a matter of days or weeks and new features in a matter of hours or days on its platform. These may take 6-12 months or longer on a legacy platform. 

The startup today serves 10 banks and 25 fintech firms across 8 countries — India, North America, UK, Brazil, Philippines, Italy, Spain, and Vietnam. In homebase India, Zeta supports the largest private bank HDFC Bank. Some other notable clients are RBL Bank, IndusInd Bank, and IDFC Bank.

Mastercard also made a strategic investment in Zeta. Mastercard invested another $30 million as part of the firm’s Series C round led by SoftBank’s Vision Fund 2 — raising the firm’s valuation to $1.5 billion.

In 2022, Zeta is focused on expansion into western markets, especially the United States. Over the next five years, the firm is investing in scaling its business to capture more market share.

“This year we will be focusing our efforts towards expanding in markets such as Spain, Italy, and the UK by July. We are also in talks with some of the top banks in North America to leveraging Zeta’s platform for issuing credit cards,” Turakhia said.

Chart of the day

As Banking-as-a-Service evolves, non-financial brands can offer traditional banking services.

Fintech experts anticipate three areas where embedded finance will create value: insurance, lending, and payments.

As BaaS paved way for traditionally non-financial companies to distribute core financial services, it simultaneously changed the role traditional financial institutions play in the financial ecosystem. Banks are concerned that embedded finance may negatively impact their current client relationships. Newer distributors have cost structures that traditional institutions, due to how they’re set up, struggle to compete against. Having said that, the potential for low-margin, high-volume partnerships with distributors is large, and this is where old-school banks can benefit. 

Recently, Finastra found that 85% of senior executives are either implementing BaaS solutions or planning to within the next 12-18 months. The study views this as an indicator of BaaS’ high potential for disruption and transformation across a number of sectors, including banking, healthcare, retail, and technology.

On the distributor side, 70% of the respondents said they’re looking to increase their spending on financial partnerships (including BaaS). On the FI side, 50% of respondents said they want to increase their number of partnerships with distributors and providers by more than half in the next five years. In addition, a good chunk (30%) off providers expect the BaaS market to grow by more than 50% per year over the next five years.

As providers seek to stay relevant and competitive, they understand the need to find new revenue sources from inside and outside the financial services marketplace. Finastra’s study found that the greater market value lies in retail offerings. In the future, however, an expansion into corporate and small businesses areas is also expected. The market in the future will likely be much more balanced between retail and corporate/SMB growth.

The study includes a side-by-side comparison of BaaS penetration of multiple banking products today, and their expected growth over the next three years

The highest penetration remains in products including checking accounts, wealth management platforms, e-wallets, cards, and personal loans. Over the next three years, the highest growth is expected in POS financing (+104%) — including both BNPL and point of sale loans — SMB lending (+30%), corporate lending (+14%), traditional deposit accounts and payment services (+30%). As noted, the report forecasts SMB lending to deliver more revenue than POS financing, payments, or corporate lending.

SMB lending presents a big opportunity for BaaS for three reasons. First, SMBs find securing loans from traditional banks inconvenient. Factors like long processes, exhaustive documentation requirements, and limited credit options cause them frustration. Secondly, the SMB lending market does not have deep established players. And thirdly, SMB lending has a sizable revenue opportunity. For example, in 2020, SMB lending generated $252 billion in overall market revenue, while POS financing (including BNPL) generated $28 billion and payments generated $205 billion.

Source: Finastra

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