By Ahon Sarkar, VP Product & Strategy, Q2
Operating an embedded finance or banking-as-a-service (BaaS) program at scale requires a lot more than just getting a product to market. In the past, we’ve talked about some common traps that folks face when developing their banking products. Now we’re going to dive into the new challenges you’ll encounter when you reach scale and how to prepare for the realm of millions of users.
When launching a product, there’s often a tendency to focus on the “shiny” things: new features, marketing messaging and strategy, getting to market quickly, and carving out your market niche. As you pivot from an initial product launch to operating at scale, however, it becomes less about making a statement and more about building a profitable business. Achieving that requires focus on several key areas:
- Building an experience around users that grows with them to create stickiness
- Minimizing risk and fraud losses while driving significant usage to maximize revenue
- Collaborating with the bank to deliver a seamless experience to users and to continue to launch innovative products
While it may sound simple, focusing on these areas can seem extraordinarily difficult when facing the pressure of continuously rolling out new features to market. Consumer surveys may suggest that you need certain new features to maximize your TAM and suddenly you’re falling into the trap of trying to be everything to everyone. Once reaching the point of starting to scale, the important thing to remember is that what’s needed to get a product live isn’t the same as what’s needed to build a business at scale. Focusing too much on expensive acquisition hooks or “shiny features” isn’t how you’re going to build a business that’s sustainable in the long run.
Preparing for scale
Before getting into what matters once you’ve achieved scale, the following should done pre-launch in preparation:
- Thinking about the business model, fraud risks, and necessary controls before building any new product. It’s much more difficult to implement material product changes after launch than before, so these areas should be deeply considered. As mentioned earlier, there tendency is often to want to “be everything to everyone”, but that’s expensive and once users get used to certain benefits it’s much more painful to remove them than it is to add them down the line.
- Make sure your BaaS platform provides the necessary tools to fight fraud. Things like data ownership and access, fraud tooling, and user-level controls are critical for your success when it comes to actually managing your program, giving users an evolving experience, and mitigating fraud. If your platform is telling you that flat files and DIY fraud tooling is the best path forward, consider your options before you take your product live. It’ll be a nightmare afterward to lack the necessary tools to manage your program.
- Make sure your bank partner has operated similar programs at scale and can help you avoid barriers on the path to success. New entrants in the space oftentimes make the mistake of thinking of the bank partner as a “utility”. The reality is this couldn’t be further from the truth — your bank is your partner to ensure you’re building responsibly, that your users get fair treatment when they’re having issues, and that your program is built sustainably over time.
Once the product is launched and many new users are acquired, the focus should shift to a few key areas:
In venture capital, the number one metric seems to be user growth, but users alone don’t drive revenue. In fact, more users can sometimes add more costs than revenues if the business model is not thought out. Because of this, “number of users” can be more of a vanity metric, whereas the more interesting metrics are around “active users” and “usage.” It isn’t worth it to overload your product with shiny hooks to acquire users. You may be thinking that you’ll become profitable once you achieve scale but doing so will require you to cut benefits that your customers will have become accustomed to. That’s not a good look for anyone.
The goal is active users, not just as many sign-ups as possible, because activity is what drives revenue. Focus on adding features that incentivize usage, such as early direct deposit, instantly issued virtual cards, and direct deposit switching. Combining features like this with a key differentiator or two will drive significant user activity and yield the revenue to offer even more compelling benefits to users over time.
As the number of significant active users on the platform rises, you’ll realize that not all users are the same. Some will connect to direct deposit, transact a lot, and are loyal, while others will provide very little about themselves (some may have even created accounts for the sole purpose of defrauding). Therefore, not all accounts should be treated the same. The loyal customer should get better benefits and features, higher limits, and customer support, while the unknown customer might warrant lower limits to mitigate potential fraud until you learn more about them (and frauds should either be identified and weeded out up front or stopped in their tracks the moment they start to try and attack your program).
Offering a tiered system like this requires picking a platform that has granular user-level controls. This will put the control in your hands and allows you to decide how to give users features, manage fraud, and help users progress throughout their financial lives.
Risk and fraud management
Fraud losses are the number-one thing that can make white-label programs unprofitable. Fraud isn’t static — there are always attempts to find better ways of breaking into your systems, incurring losses or stealing your clients’ information.
Three measures should be taken to counteract fraud:
- Prevent bad actors from coming on your platform by choosing one that offers the best of KYC providers with granularity on “scorecards.”
- Ensuring your platform gives you ownership of card data and access to fraud tooling and controls (and advice when you need it). This will help manage down the fraud in your program and keep it profitable.
- Focus on security. Your systems are only as strong as your weakest link, and you should hold your platform to a higher security standard than anything else.
People sometimes argue that in the world of BaaS, the bank merely provides commoditized services. That couldn’t be further from the truth — just wait until you have your first issue or need to launch your next product. Having a close relationship and tight collaboration with the bank partner is critical to providing your users an excellent experience. Users shouldn’t feel disoriented and alone when they suddenly get transferred to a bank to settle an issue.
To make sure this collaboration goes well, ensure that the platform the product is built upon has a shared admin console between you and your bank. Simple flat files won’t do. They don’t capture the nuance of the interaction, give you the capability to act on behalf of your users, or let you set “permissions” to control your own exposure internally. Make the change sooner rather than later — your CSRs and member support staff will thank you.
Focusing on these key areas make up a strategy for operating effectively at scale. The important thing above all is to never stop asking: how can you improve usage, security, and your bank relationship?
Any company getting started and in the market for a platform could refer to this article to formulate the right questions: what sort of card controls do you offer? Who is your KYC provider? How do I collaborate with the bank? Asking these questions will help you find the right platform for you.
While it’s important to set the program up to succeed at scale, capturing the user’s attention is the first step. To learn more, check out Q2’s eBook: The Age of Abundant Banking: How to stay innovative when every company offers a debit card.