By Jan-Erik Asplund | Sacra | September 30, 2021
The new banks
Over the last several years, there has been an explosion of retail, travel, SaaS, and other companies expanding into financial services.
Walmart, IKEA, ServiceTitan and Toast are just 4 of the companies that have launched products like underwriting, interest-free credit, payments and bank accounts in an effort to provide a better experience to their customers and get closer to their wallets.
Leveraging their reach and data, brands are able to do something with these products that traditional banks like JPMorgan Chase or Bank of America or Wells Fargo have never been able to: deliver personalized experiences at scale and at the point of sale.
Where banks provide a highly regulated and repeatable set of products, brands and fintechs can harness demographic and behavioral data to build new kinds of product experiences that ultimately bring them closer to consumers.
We broadly organize the relevant companies in this space into three buckets:
Issuer processors 1.0: Companies like Marqeta and Galileo which provide API-first card issuing and processing.
Issuer processors 2.0: Companies like Lithic and Highnote that bring card issuing to the long tail of developers instead of focusing on enterprise sales.
All-in-one BaaS platforms: Companies like Bond, Unit, Productfy, Treasury Prime, Synapse and Synctera that offer compliance and operational heavy-lifting and assemble banking license providers, card networks and third-party issuer processors to provide a one-stop experience for fintechs and brands.
Card issuing-—the job of issuer processors—sits at the center of BaaS, because without cards, companies have no payments or accounts. Here, you have companies like the $12B Marqeta ($MQ) challenging legacy payment processors like Jack Henry, TSYS and First Data (Fiserv).
While those legacy providers are still responsible for the vast majority of B2B and B2C payment volume, digital issuer processors like Marqeta have come to power core product experiences for companies worth billions in market capitalization: fintechs like Klarna, Chime and SoFi and brands like Walmart, Apple, Uber, and DoorDash.
As banking platforms around the world have opened up their APIs and banking itself has gone looking for new distribution channels, a new generation of “BaaS” companies has risen to take the premise of Marqeta one step further—offering not just cards but lending, crypto, deposits, and other banking products as a service.
Twilio CEO and co-founder Jeff Lawson has said that Twilio “acquires developers like consumers” and enables them to “spend like enterprises.” Banking-as-a-service represents a similar mentality, ported to the world of financial services.
And just as the rise of Twilio corresponded with the rise of both mobile and the cloud, the rise of BaaS is happening amidst the emergence of embedded finance: companies using card issuing not to drive revenue, but to provide automation and richer feature sets within apps for better retention.
Twilio placed a bet on telephony becoming critical for developers everywhere, whether their app was centered around the idea of communication or not. Today, Twilio has more than 150,000 customers across industries using Twilio’s APIs to communicate with their customers and with each other.
Embedded finance can open up a similar opportunity for BaaS, with developers enabled to spin up features like courier cashout and POS advances without spending weeks and months and millions of dollars getting it done through traditional channels, and where companies like Unit, Bond, Treasury Prime, Productfy and others have the potential to both fuel and capitalize on this transformation.