‘It’s like marrying the best of the bank and fintech worlds together’: Q2’s Paul Walker
- By partnering with fintechs, traditional FIs can offer modern digital solutions and expand into new markets.
- The two keys to the FI’s success is full executive buy-in and a distinct treatment of the digital strategy alongside the full service model.
The following was produced by Tearsheet Studios. We worked with Q2, a digital banking software company, to create a four part podcast series on the interplay between banks and fintechs.
Partnership with fintechs through Banking as a Service has given financial institutions an opportunity to capture new markets and revenue opportunities. The success of this partnership depends on each side bringing in what they’re best at; and especially the banks being willing and able to do things differently, in order to better serve and effectively grow their customer base.
In this episode, I spoke with Paul Walker, who's been with Q2 for the past 15 years, and currently serves as the GM of Q2’s Banking as a Service division.
Paul Walker, Q2: Having been in the space for 20 years, a lot of my focus early on was around bank and credit union partnerships. I've always been very much about what's next and being tech forward. What I liked most about this business model is that it's not a competitive landscape in the way folks felt about it five years ago. There’s such a big win in this for financial institutions that want to participate. In this partnership model, both parties can win, and win big.
To succeed in the era of digital transformation, banks could use a little leverage. Enter Banking as a Service. One of the most important challenges it helps banks overcome is surpassing the weight of legacy technology.
Paul Walker: In my opinion, the key to successfully partnering with fintechs and brands to offer BaaS within their mobile apps or creating mobile apps is thinking in terms of the fintechs -- who are typically very tech forward and want to move very fast. To offer banking products and services, they're going to want companies that can move at the same pace. That could be a real challenge for legacy processors that are designed for full service banking.
Traditional FIs were born and raised in the physical branch. But with BaaS, they’re able to grow their customer base nationwide. And that often means serving new markets that the bank has never served before.
Paul Walker: In the past, financial institutions were so worried about not knowing those markets intimately. They always had interest in expanding beyond their physical footprint, but oftentimes didn't know how to do that through an exclusive digital strategy.
When you start to get outside those physical bounds, it becomes a true digital only strategy. And that's something that I don't think most financial institutions had a lot of comfort around; they always saw digital as a complementary strategy, not an exclusive strategy.
The BaaS service model is made of two key players: a financial institution and a fintech company. What exactly does each bring to the table?
Paul Walker: From a financial institution perspective, it starts with oversight and compliance. They are the regulatory interface. They're on the hook if a card issuer breaks the rules, disputes that aren’t resolved on time, money laundering, KYC, etc. The great news is that the bank already has a lot of the infrastructure in place. Playing that role primarily is something they're very comfortable with, and it’s really where they excel.
As for fintechs, they’re taking on the primary responsibility of user experience. Oftentimes they have an existing mobile app, but sometimes they may be building an app from the ground up with banking capabilities.
Beyond the user experience, what lands on the fintech is all the marketing, promoting, and customer acquisition. What they do well is communicate with those end users -- they understand social media and how digital marketing works. Beyond that, they have the responsibility to work closely with the bank to make sure that they are adhering to the standards, processes, and policies of the bank.
This partnership is no small feat. Banks are accustomed to interacting with their customers face-to-face, and curating their customer experience. This change means banks are interacting with new customer segments indirectly, and acting as a utility service provider to fintechs who take front stage.
Paul Walker: This is a business model that doesn't work unless you have your full board and executive buy-in. I've seen banks fractured on this where certain executives are still 100% focused on full service banking, while the others are moving into the arena of banking as a service. You need complete alignment. That doesn't mean you're departing from your full service strategy, but you need to be fully bought-in to both business models. Without your board and executive buy-in, what you're unlikely to do is the second critical piece in my mind, which is: treating this as a clear, separate line of business.
This is not an extension of the bank's full service business model. This is a business that is focused exclusively on digital engagement, so the business model is completely different. In terms of the engagement model, you’re not directly interacting with the end user -- you're playing a role behind the scenes. You have to have an operating model that is truly dedicated to a very different go-to-market strategy.
Buy-in is necessary for change. And that begins with a willingness to innovate. Traditional FIs are built on heavy legacy technology, and partnering with a fintech company often means letting go of how things are done in favor of new strategies when it comes to digital banking.
Paul Walker: We've seen folks who want to leverage their existing core. That could be problematic around how workflows happen, from onboarding to segmenting customer data. In our business model, we truly segregate this business line from the full service banking. Traditionally, we'll give our bank partner a different routing and transit number, and run a different tech stack with all the dependencies.
From a technical architecture perspective, that is the mindset that financial institutions need to really embrace. They've got so much historical baggage with what it takes to operate a separate modern core, that they assume that it's just 2x the work. When you see some of the next generation technology out there, you realize how much more efficient it is to run this business model effectively, in a way that’s designed for this business model exclusively.
We’ve heard about what it takes for an FI to succeed in partnering with a fintech. But what does an FI need to do before the partnership even begins?
Paul Walker: It really starts with a financial institution asking itself what it wants to accomplish from an out-of-market strategy. We want to understand what their goal is: do they want to own the customer experience, (if so, they may actually be more interested in launching something like a direct bank) or do they prefer to partner with a fintech or a brand and allow them to drive the sales, marketing, and overall customer experience? The good news is that the technology stack we have can actually accommodate both scenarios. But it's extremely important that the financial institution understands what the strategy is.
It's an exciting time. We're excited about the financial institutions that have started to really lift up their heads and ask those questions.
Given Q2’s experience working with a variety of different financial players in the market, what kind of growth can FIs expect to experience through building a partnership with Q2?
Paul Walker: Our bank partners range from a little over a billion dollars in assets and up to five, six billion dollars in assets. We now have two of our bank partners that are in the top 50 banks by total of accounts serviced in a very short window of time. Servicing that number of accounts is very important to these financial institutions. When I start to think about how long it would take for them to reach some of these numbers in the old full service model, it's just unachievable.
Oftentimes, these banks have been around for 40 or 50 years, and maybe maxed out at a portfolio of 50,000 to 80,000 total account holders. Now, after a couple of years of partnering with some of these fintechs and brands, they're now sitting on a couple million consumer accounts.
BaaS providers deliver the APIs needed to facilitate the partnership between banks and fintechs. In a growing market of new options, what exactly differentiates Q2 from the competition?
Paul Walker: The thing that separates us from others in space is that we have proven scale. We have successfully launched some of the largest brands in the market, and I think very few providers can demonstrate that success.
We've been in this space for over five years. Having worked very closely with some of those very first generation launches helped us to understand what areas we needed to focus our development and operations on, and mature this business to scale at the level that some of these large companies have been able to.
Some of our clients that we've worked with over the last several years are clients like Acorns and Betterment, from a fintech perspective. From a financial institution perspective, we worked with folks like Sallie Mae Bank, and have a track record and history with those organizations. These companies have helped us scale, and were definitely some of the earlier stage companies to launch and have a strategic direction of where they want to take the next chapter.
What also separates us within the pack is that we really are a core processor at the end of the day. We often have competitors who may actually be middleware sitting on a legacy core, which could be problematic in certain areas of this business. When you talk to fintechs and brands, one of the things that we hear often is that they want to offer true core banking products -- that's not things like prepaid or stored value; what they're typically talking about is having true DDA offerings, like paperless checking accounts, savings accounts, debit cards, etc. They want true DDA accounts, because in most cases, they're not just looking to launch a card -- they're looking to offer an extensive portfolio when it's all said and done.
Both banks and fintechs are in it for the long run. Banks understand that digital banking products are now an integral part of the customer experience, and fintechs seek to offer new and exciting ways to achieve that experience.
Paul Walker: Right now, there's this perception that most of the fintechs and brands are solely interested in getting a card out to market. But that’s not the conversation we typically have. It's an important stage one rollout, but when we sit down with the executives of these fintechs and large brands, what we see is a roadmap and a portfolio that they plan to offer.
For companies in this space that are singularly focused, I think it's going to be hard to be that strategic partner over time and to actually accommodate these roadmaps. This becomes a broader opportunity with our bank partners: we didn't just help them partner with a fintech or a brand to launch one product, and it stops there. There's this ecosystem of expanding that portfolio, being that strategic provider from a tech perspective and from a bank perspective.
To close off, I asked Walker a serious personal question: what excites you about working in this space? What gets you out of bed in the morning?
Paul Walker: To me, it's like marrying the best of the bank and fintech worlds together, which is really pushing the envelope from a tech perspective -- the things that consumers have always wanted to see in financial services, while still seeing financial institutions play a critical role in achieving these goals. That's what makes me most excited. We really get to leverage both sides of the coin in a way that this market has not yet optimized.
And so the last few years have been exciting. And as I mentioned earlier, I think it's early innings, and that's what gets me out of bed every day.