‘It’s exciting reading the feedback on Twitter that banks get from offering these new services’: Behind the creation of the Q2 Marketplace

The following was produced by Tearsheet Studios. We worked with fintech software provider Autobooks to create a four part podcast series on the evolution of business banking and how banks can better service SMBs through a changing mindset, partnerships and integrations. Listen / read our other installments of the series here, here and here .

We’ve moved beyond the paradigm of banks versus fintechs. Banks are partnering with top technology companies in a way that plays to both parties’ strengths. But these partnerships are resource-heavy and hard: hard to get to contract, hard to integrate, and hard to slot into changing priorities.

Q2 is a banking software firm in Austin, Texas. 400 banks and credit unions use its software to power digital banking. Tearsheet spoke with Greg Varnell, vice president of product and development in the Innovation Studio at Q2. Greg describes the Q2 Marketplace and how fintechs and banks are using it as a way to more closely and more quickly partner.

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The following excerpts were edited for clarity.

Greg Varnell, Q2: My name is Greg Varnell. My title is Vice President of Product and Development in the Innovation Studio at Q2. The Innovation Studio is how Q2 empowers our banks and fintechs to utilize the Q2 platform, extend it, and build on top of it. And so for banks, that can be new extensions, new capabilities that interact with other systems that they have or the core interfaces for fintechs. It's all about delivering their products and their features inside of the Q2 ecosystem of products.

Who is Q2?

Greg Varnell, Q2: Q2 is a digital experience company. We were founded in 2004 in Austin, Texas. Today we are a publicly traded company on the New York Stock Exchange under the ticker symbol QTWO. We have a series of products for banks and credit unions around online banking or digital banking. We have product opening, lending products, and a core based API product that we offer, as well. But the Innovation Studio and the Marketplace that we're talking about today are really focused around our digital banking platform.

What is this marketplace that you speak of?

Greg Varnell, Q2: The marketplace is kind of a new commercial model that we built out around our Innovation Studio features. So we have SDKs and APIs that allow fintechs to integrate their products with our platform in the Marketplace as a commercial strategy. It's where branded applications can essentially target the customers of our banks and the members of our credit unions. So instead of us targeting the banks or the FIs with the product, we're actually going all the way through to the end users.

The nice thing about that model is it is a way that banks can provide new products and innovations without having to take all of the risk on upfront, which is typically seen in the traditional model. That risk is most typically in the form of expenses. Typically, there are implementation fees, their monthly minimums.

With our marketplace, FIs are able to take those products and features at no charge. And the revenue is completely driven by the end users purchasing the subscriptions for those products, or in the case of some products, transactional revenue that's generated through the use of those products. And so it's really kind of changed the model and made it easier for fintechs to deliver their solutions to the 400 plus financial institutions that Q2 has, and the 18 million end users that utilize our platform. And it's allowed banks and credit unions to be able to acquire that technology and make that technology available to their end users with less of an upfront cost. We're just trying to streamline that process.

That makes a lot of sense. Can you also take us back to the genesis story around Marketplace? How did the concept come about?

Greg Varnell, Q2: Our founder and chairman of the board, Hank Seale, has been talking about an e-commerce platform inside of the digital banking platform since the 90s. And I have documents to prove it. And so it's always been something that's in our back pocket to talk through. What was missing was the technology in the platform to make this happen.

A couple years ago, we basically looked at our SDK and API technology. And we said, you know what? We have everything we need to bring a marketplace together to the market. And so we did. We purchased some technology to help us actually run the store and handle the billing and the invoicing and the charging and everything that's necessary for this integration to the end users. And then basically, we just built on top of the platform, that integration.

We started talking with fintechs and Autobooks was one of the very first fintechs that we talked with. We had a relationship with them through the traditional model. They had a single sign-on that we had written. I think there was some frustration from them every time they sold their product -- it required an engagement from that customer to Q2. And there were charges there and timelines associated with that and so it caused some challenges for Autobooks and our customers.

I think Autobooks was also just experiencing the risk of customers taking on their products. We had one particular customer that has since launched on the marketplace that told us that they were a massive fan of Autobooks. They wanted to use Autobooks in their previous financial institution. And then when they moved over to a new financial institution, it was one of the very first things they started pitching. And every year it fell out at the budget cycle because they just couldn't get the budget in order to do Autobooks. We started talking about this marketplace model. I think Autobooks quickly realized the opportunity that this would give them going directly to the 18 million end users that we have on our platform, almost bypassing that initial sale to the financial institution.

They jumped in with both feet. They wrote the integration and integrated with our marketplace, and we were able to launch their launch with the marketplace. From the beginning development to launching, it took about the same time that it typically takes them to launch with one of our customers in the previous model. Now, since they've done that, we're able to launch customers with Autobooks now in a matter of weeks. So it's completely changed their lifecycle, both from a sales perspective and an implementation perspective, which I think has been exciting.

That customer that I talked about, that was originally unable to get Autobooks, was able to acquire Autobooks through Marketplace, because it changed that commercial model for them. And now they're seeing tremendous success with their end users.

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That's a great story. What specifically are the benefits for the FIs participating in the marketplace?

Greg Varnell, Q2: The benefits are multi. We tried to really solve a lot of the challenges that we see financial institutions experience when they're trying to acquire technology. There's never anyone I've ever talked to that says they don't want to be innovative and don't want to offer new features and new functionality.

I feel like as an industry, we really put a lot of pressure on the financial institutions to be innovative and to provide new technologies and new capabilities and new features. But then we tried to make it as difficult on them as possible to do so.

That's what we were trying to solve with Marketplace. And so there are compliance and operations type facets to the marketplace, where we try to help with the due diligence, and we try to provide the information to help them be able to make those decisions quicker, including from the contracts Q2 has negotiated with the fintechs. Our customers don't have to do that -- they get to take advantage of the contracts that we've negotiated on behalf of all of our financial institutions.

So, it's a quick contract and then very quick implementation. The marketplace is written with our SDK in a way that we can launch it in a matter of days. And so once an FI has decided that they want to take on a new product through our marketplace, we can literally turn some of the products on the same day (some products that require some implementations between the financial institution and the fintech can take a little bit longer). We're seeing timelines decrease tremendously. And then, for the most part, we stay out of the way. We're not coming in with contracts and pricing and timing and slots and implementation timelines -- all that kind of stuff that that you traditionally see.

So for the FI, it is that kind of group negotiated rates. It's the very quick implementation timelines. It's assistance with the documentation and the compliance information that they need. And then it's the very quick to market launch. We also support the financial institutions with marketing materials and the go to market strategies to launch with these fintechs. As you can imagine, for these banks and credit unions, the technology is just one small piece of the overall product offering. There's support models, there's marketing, there is communications and education that needs to happen as well. And so Q2 is able to take a leadership role in each of those through Marketplace.

What's in it for on the other side of the marketplace, for fintech companies? What do they get out of the Q2 Marketplace?

Greg Varnell, Q2: For fintechs, there are really two key features. First is the ability to target those 18 million end users that we talked about at the 400 plus financial institutions we work with. A lot of younger fintechs, building out the sales teams, doing the negotiations, doing the contracts -- it's really where they spend the majority of their time and not spending the majority of the time in the technology. And so with the marketplace, a single integration into our platform provides them access to all of our customers, regardless of core, regardless of the other integrations that are necessary. That can provide a real kickstart for the fintechs in order to really gain market share.

The other thing is our platform, as a whole, provides a lot of technologies to these fintechs. It can actually speed their technology build out of some of the capabilities of their products, as well. One story I like to share is we were talking with a fintech that basically does team management for commercial entities. Think employee scheduling and time cards -- that kind of stuff. We said, man, you have all this information. You know an employee was scheduled to work on Monday and he showed up and clocked in and clocked out on Monday. It'd be really cool if he could just get paid immediately. The fintech said, no, we don't want to know their SSN. And we don't want any of their NPI data -- we don't want to have access to any of that because that's just a risk we don't want to take on.

The cool thing was with the Q2 platform, they could actually initiate that transaction without having to know any of that information about the end user, because our platform provides that capability, as well as the segregation of that data. So they could tell us, pay us and we could go initiate the rest of that without them having to have that NPI data. I think that's a really neat piece of our platform: we're a 16 year old company and have a tremendous amount of capabilities on the platform that we built over time. And so fintechs can actually take advantage of those capabilities, too.

Do you have any other examples that demonstrate the potential of the marketplace?

Greg Varnell, Q2: There's another example with Autobooks, where we had a customer that couldn't purchase Autobooks because it did not have an interface to their core. And in order to build that interface to their core, to receive the balances in the transaction history necessary for Autobooks' accounting platform, it was going to be a tremendous amount of implementation and development effort for Autobooks -- somebody had to pay for that.

When the marketplace came along, Autobooks was able to get that balance information, that transaction history from bank to its platform, because we already have those integrations. To run a digital banking platform, we have to have excellent integrations with the cores. And so they were able to take the marketplace. Autobooks was able to get the balances and transaction histories and didn't have to go create that integration, which means nobody had to go pay for that integration because it wasn't necessary. And so I think that was a huge win, both for Autobooks and the financial institution.

Ultimately the winners are the banks' and credit unions' end users that get to get to take advantage of these new features inside of the platform. The most exciting thing is reading the Twitter feeds and the feedback the banks and the financial institutions get from offering these new services to their end users, and the excitement that they have getting these new capabilities without the FI and fintech having to take a lot of risk. I think that's been the most exciting thing to see.

So when you look forward into the future, what do you see as the impact of the Q2 Marketplace on the financial services industry?

Greg Varnell, Q2: It's putting banks at the center of the commercial needs of their customers. And looking forward, we're going to do that through technology, which historically, banks did through relationships. I look back at the 60s and 70s. If I wanted to start a business, I'd go to my bank. And that's where I'd look for funding. They would give me names of realtors, if I needed to find a location, they'd give me names of accountants that could help me out. They'd give me names of attorneys that could help me draft the legal documents that I needed to start my business. Really, the bank was the center of the universe when it came to commercial entities.

If I wanted to start a business today, I just probably go to a ton of different websites. But, I'd probably still go to a bank to get the lending. With the marketplace, we can bring the bank back to the center of that relationship, where I could go to my commercial bank, and I could have access to all of those various technologies from a single location, through a single authentication, through a single account.

The nice thing for commercial entities, and even retail entities, is now you're doing it from a very trusted login and authentication, from a single end point, and you're gaining access to all of the things you need to either run your personal financial life, or as a business, to be able to run your business through that single pane of glass. We really think that is a tremendous opportunity, both for the commercial end users and for the bank, FIs and for the fintechs.