Wildfire: The industry-by-industry spread of banking as a service
- Banking as a service has progressed from its original role enabling neobanks to investing, PFM, and more.
- One can look at how banking as a service has performed in nearby industries to gauge whether it’s worth adopting.
By Ahon Sarkar, GM of Q2 BaaS, Q2
Everybody and nobody wants to be first to adopt a new technology. Companies want to be innovative and access first-mover advantage, but being first entails a high degree of risk because the model’s unproven. It’s a bit of a paradox. How do you solve it? With concentric circles of adoption.
Start with an initial industry. That industry is the first to adopt a new technology and consists of companies closest to the new technology. For instance, when banking as a service (BaaS) came along, you initially saw neobanks like Chime pop up. Banking technology, banking industry. From there, you expand industry by industry as each sees the adjacent vertical enter the space. The closest industry to banking was investing, which ended up as the first industry outside of banking to offer embedded banking products. So you saw companies like Acorns adopt banking services to support their customers by allowing them to purchase stock and cash out their investment earnings to a bank account linked to a debit card, circumventing the waiting period associated with traditional investing accounts. This only happened when investing companies saw the model working with neobanks.
Once the investing model proved successful, other nearby industries started to look at the BaaS model and wonder if it could work for them. The closest industry to investing was personal financial management (PFM) companies like Credit Karma. Adding banking products to this industry allows for proactive card controls to limit spending.
Next up is technology companies that touch finance but aren’t really fintech themselves. Companies like Gusto -- who are more payroll and HR -- have adopted BaaS to allow services like early cash out, which lets end users access their paycheck a couple days early.
After payroll, who do we see offering banking services next? At Q2, we see a lot of use cases and prospects who are considering BaaS, so we know that the next industry to enter the pool is consumer brands. Before they jump, they need to see the BaaS model proven out at scale, which we’re seeing now with companies like Credit Karma.
But what are some other industries that could benefit from BaaS? There’s a world of new use cases popping up. Let’s go over a few of them.
Let’s say your house gets destroyed in a tornado. You need a place to stay and can’t afford it on your own. You need your insurance money. But right now, you have to submit a manual claim, wait two weeks, and then you receive a prepaid card in the mail that you can only use once.
Instead, with BaaS, you can submit a claim over the phone and instantly receive a virtual card on your phone, allowing you to spend with it immediately and move into a hotel. Even better, your card comes with rewards for Home Depot, Ikea, and other relevant businesses, so as you spend money to fix your house, you get rewards and push your total available funds even higher. Furthermore, the insurance company benefits as well because of interchange revenue. They’re now earning 1% on everything spent using the debit card, which is equivalent to lowering their loss ratio by 1%. That’s a huge deal.
Whether you’re a barber or you live in LA, there are banking services built for your particular needs. One example of this is Affinity Bank, who started out serving dentists and has since expanded to many other business groups.
Loyalty and rewards
Using the data available to you through your debit card spend, you can earn cash back on services that are relevant to you. Let’s say you spend a lot of money on shoes. Companies can identify this tendency and give you 5% off your next Nike purchase by negotiating with retailers.
The needs of gig economy workers aren’t currently being met by traditional FIs. They need new solutions. For example, what if you’re an Uber driver and you got paid to an Uber debit card instead of direct deposit to your bank account? You could get paid more often because Uber avoids costly ACH fees, and also access your funds quicker, preventing you from having to use payday lenders. Plus, you could get a percentage off of gas every time you fill up at the pump. And Uber will receive 1% of every purchase thanks to interchange revenue.
Lending & Buy Now, Pay Later
These offer lending services that make funds immediately available for use through a debit card. And you can enhance the personalization of the service by increasing the limit on your funds as you successfully borrow money and pay it back.
The options for BaaS are vast, and we’re still in early innings for this technology and its progression. Considering BaaS? You only need to look at industries currently thriving with these services to make the decision for your company as well. And if you want to learn more about banking as a service, check out Q2’s eBook, The Age of Abundant Banking: How to stay innovative when every company offers a debit card.