By Ahon Sarkar, VP Product & Strategy, Q2
As more and more nonbanks embed finance into their offerings, clear pathways to success (and failure) have emerged. Through our experience helping large, T1 tech and fintech companies scale their banking products, Q2 has identified three key points of failure that frequently get overlooked — but must be avoided — in order to effectively offer banking products at scale.
Failure #1: Thinking about BaaS as just adding an account and a card.
It used to be enough for a fintech to offer an account and a debit card and call it done. That was revolutionary by itself. But with increased competition from neobanks and others powered by BaaS platforms, that’s no longer the case. Now, a debit card on its own is just a paperweight. Who wants a random debit card taking up space in their wallet? Or a bank account just sitting out there in the world? Nobody. In order to extract value from your banking products, you have to provide a strong incentive for the customer to use them and do it in a way that goes beyond the banking product itself.
That extra incentive comes from your core service offering — what your company offered before you even started thinking about banking products. You have to intertwine this core offering with your banking products in order to do something meaningful and different for your users. In other words, to solve a new, specific problem that they have, and ideally expand your competitive advantage.
For example, let’s look at Gusto’s Wallet product. Their differentiated solution is early access to your paycheck via a Gusto checking account. This solves the customer problem of turning to payday lenders when an unexpected expense comes up — who often take 20% of your paycheck. Gusto leverages their core service offering, which is payroll and benefits, and combines this with their account product to create a new service offering.
A key advantage of BaaS is the data it yields. When you use a cloud-based core to offer banking products, you have full access to the data, which legacy cores can’t provide. Take this into account when developing a unique solution for customers. Explore your newfound data. Analyze it. And develop products that leverage it.
Failure #2: Trying to be everything to everyone.
One common misconception about how to launch banking products is to start by replicating the features of other existing products. This is the wrong approach on multiple levels:
- You aren’t going to solve a new problem by providing the same services as everyone else. New solutions are what attract customers.
- You’re going to bloat your product development in a way that prevents you from giving each feature the attention it needs to become best-in-class.
- You’re going to spend a lot of money unnecessarily, frightening those who control the budget and spreading yourself too thin.
- Other established players already offer a diversified set of features. It’s difficult to compete with this value prop when you’re just getting going. You can eventually be everything to everyone, but that isn’t the way to start.
Instead, start small. Focus on the specific problem you’re trying to solve and become the best at solving that problem. Identify the “it” factor — the feature that’s going to get people talking about your product — and work exclusively toward making that “it” factor the best it can be.
Think of yourself as David, not Goliath. While Goliath can swing his sword with reckless abandon, David has limited resources (rocks) and needs to hit his target with precision. Figure out your competitive advantage and put your resources toward its execution. Even though your resources may be small, if you hit the target, you’ll still win.
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Failure #3: Not choosing a robust platform at the start.
When you first start building banking products, it’s easy to say that you want the most economically efficient platform. “The least expensive platform that will suit our needs,” you say. But let’s look at that sentence carefully. What time frame do you want to assign to your needs? Your needs when launching will look very different than your needs down the road.
For example, the user load you expect to support will grow as you scale. If at the start you select a platform whose architecture will crumble after 300k users, you’re going to have to transition your technology to a new, more robust platform eventually — assuming you’re betting on yourself and expecting your product to grow. You have to factor those transition costs into your initial investment and compare them to the cost of purchasing a more robust platform in the first place.
At Q2, we’ve found that in nearly every case, it works out better to invest in robust infrastructure up front than to transition later. Most companies who opt for the cheaper option simply don’t understand the pain and expense that will come from a transition (or the pain points they will experience along the way). It may cost a little more at first, but you avoid having to slow yourself down while you’re succeeding later on.
These three failures will stunt your growth, so avoid them! If you’d like to equip yourself with more knowledge about banking as a service and how to navigate a new era where banking products are ubiquitous, check out Q2’s eBook, The Age of Abundant Banking: How to stay innovative when every company offers a debit card.