25 Questions for Chris Dean about Embedded Banking (Banking as a Service)for Startups
Many startups are looking to embed banking services into their product as a way to generate revenue, control how funds flow through their product, and access valuable customer data. These products also help you increase customer lifetime value (CLTV) and boost loyalty with reward programs.
For early-stage startups, this can be a great way to monetize your product without charging upfront fees or monthly costs, although you can definitely do that as well and kick off your offering with more than one revenue stream.
I recently spoke with a group of YC founders from the W22 batch about how to embed banking services into their product (e.g. offering bank accounts or debit cards). Here are answers to some of the most common questions I received during and after our session.
Why am I qualified to talk about this?
I’ve been in your shoes before. My co-founder Jim and I started our company Treasury Prime in YC during the W18 batch. I’m the CEO of Treasury Prime, which is a Banking as a Service provider that offers banking services via API. We’ve built the technology that connects companies with banking partners that can help them launch their own banking products.
We’ve grown quite a bit since those days. Today we have more than 80 fintech customers, process over $1 billion in transactions every month, and have helped a number of YC companies launch their own banking products.
Embedded Banking Questions
1. What is embedded banking?
Embedded banking is all about integrating banking products, services, and capabilities into your product through the use of banking APIs. Through these APIs, you can offer products like bank accounts and debit cards, as well as give your end-users the ability to access bank information and use banking features from your website or app.
For example, Fractional (YC W21) uses our API to allow their customers to quickly create bank accounts and Bench uses our API to allow their business customers to view their account balances within their accounting app.
2. What is Interchange?
Interchange refers to fees that merchants pay a card issuer to enable a transaction via the card's network. The purpose of these fees is to cover the costs associated with accepting, processing, and authorizing card transactions. These fees are a common revenue stream for fintechs that offer card products.
A few important things to note about how interchange fees can vary:
- These fees may differ depending on whether someone is punching in a card number online or swiping a card in person.
- The amount of interchange received from credit cards is only slightly higher than debit cards in practice.
- Whether the use case is commercial or consumer can impact fees.
- Interchange rates may also depend on the merchant category. Rates for a sporting goods store, for example, may differ from rates for a travel company.
3. How are different banking products monetized?
Fintechs typically earn revenue on banking products through four different streams: account balances, payments, interchange, and monthly fees (like SaaS costs).
Outside of monthly fees, here’s how banking products are typically monetized:
4. What is an FBO account?
FBO accounts (“for benefit of”) are larger umbrella accounts held by business entities that contain smaller sub-accounts. When a fintech opens an FBO account with a bank, it uses it to issue “virtual” accounts to customers and tracks these virtual accounts on a ledger.
I recommend reading this blog to learn more about FBO accounts.
5. How do banks decide what use cases they support?
Banks look at a number of factors when they consider who to partner with and what use cases to support, which may include:
- What industry the business operates in
- Where the business is located geographically
- How healthy the business’ financials are
- The level of funding the business has
- How many users the business has
- Who are the customers they do business with
- How long they have been in business
- What the business’ current money movement looks like
- What the business’ risk profile looks like
- Whether the business has an appropriate compliance program for their risk profile
Jeff Nowicki, our head of bank partnerships, recently wrote a blog about what banks are looking at in terms of fintech compliance.
6. What banking products are customers most interested in?
The main two are bank accounts and debit cards. Depending on the business, there are other capabilities that customers may be interested in such as Remote Deposit Capture and Bill Pay.
7. What are some core metrics to track for card programs?
The card program metrics you track will vary based on your use case, but they can include:
- Number of issued/active cards
- Number of transactions
- Total/Monthly transaction volume
- Chargeback to transaction ratio
- Number of card disputes
- Reasons for disputes
8. Do you have any tips on getting debt financing?
Sure, here are two tips:
- Spend time building a direct relationship with your bank partner. When you’re launching a fintech offering, your bank is your most important partner.
- Many companies have success using a working capital line of credit to launch a proof of concept and get enough users in their system to predict the return rate. Then they take that data to a bank and apply for a line of credit. This approach is pretty easy to scale. As you get bigger, you just renegotiate your lines of credit.
9. Are there too many neobanks? Do you think big banks will eventually acquire challenger banks like Chime and others?
Sure, some challenger banks will get acquired, but it’s still too early to tell which ones will get acquired. Overall, the neobank space is still really early. There’s room for at least 50 big retail neobanks and we’re probably only at half of that. Time will tell who the winners are, but the competition is pretty huge.
I think the banks that serve a niche market better than anyone else will find success. Purpose is one of our customers and they’ve hyper-focused on vegan banking, which falls under the bigger niche of ethical banking. These are use cases that are harder for a big bank to mimic.
10. How do you evaluate a card issuing solution?
Here are some questions that can help you assess card issuing providers:
- Who are the sponsor banks?
- Does the fintech have a direct relationship with the issuing bank or BIN sponsor?
- Who does the program management?
- Does the company have consumer and commercial BINs set up?
- Will the card issuer manage the printing processor or does the fintech need to do it themselves?
- What are the timelines for card design approval, printing, and shipping?
- Are there card order minimums?
11. Are there licensing requirements you need in order to add embedded banking into your service offering?
No, but there are several compliance elements that fintechs need to have in place in order to add banking capabilities into their offering. Sheetal Parikh, our associate general counsel and VP of compliance solutions, recently wrote a blog about what every fintech needs to know to manage risk and compliance successfully.
12. Can you tell me more about bank account fees?
There are many kinds of fees that banks may charge on accounts, but these are the main fees that most people encounter:
- Overdraft or ODP fee: When a customer with overdraft protection or overdraft privilege (ODP) makes a purchase but their account does not have the funds to cover it.
- Non-sufficient Funds (NSF) fee: When a customer does not have overdraft protection or has already overdrawn their account and attempts a purchase, which fails.
- Service fee: Banks may charge customers a service fee on an account if it falls below a certain threshold balance.
- Closing fee: Some banks charge customers closing fees for closing accounts.
- Statement fee: When a bank charges a customer for receiving a paper bank statement in the mail.
- Checks: Banks may charge for issuing checks to customers
Treasury Prime Questions
13. What features does Treasury Prime offer?
Treasury Prime offers a long list of banking features, but here are some of the main ones that companies use our API for.
- Account opening
- Account services
- Card issuing
Check out this image and our documentation for more information.
14. Does Treasury Prime offer cards or support card issuing vendors?
Yes, we issue cards directly with our partner banks, and we’ve partnered with Marqeta for the more complex use cases. Our customers can issue, activate, and manage the entire card lifecycle with our API. We also provide program management services including network agreements, BIN management, fraud detection tools, and custom card design, printing, packaging, and shipping services.
Feel free to try it out in our developer sandbox.
15. Can Treasury Prime process card payments?
Outside of our debit card program, Treasury Prime does not offer card payment processing services at this time.
16. Does Treasury Prime support digital wallets?
Yes, we recently launched support for Digital Wallet tokens that allow users to add cards to their iOS or Android devices (Apple Pay/Google Pay) and then pay with those devices.
17. Does Treasury Prime support check payments?
Yes, you can use our API to send physical checks to customers in the United States.
18. Can Treasury Prime support immigrants on H1, H4, and F1 visas?
We definitely support H1 visas, but generally, it depends on which one of our banking partners you are using. If you’re thinking about a particular use case, send us an email at email@example.com with more details.
19. What are typical physical card issuing costs and timelines?
Card programs typically take anywhere from 4-8 weeks to launch, but some factors can speed up or extend your timeline:
- Stock cards vs custom designs
- Getting your own BIN vs sharing a BIN
- Adding features for contactless payments
Among physical, digital, and virtual cards, physical cards are the most expensive to issue because you have to manufacture and ship them. Adding features like dip or tap payments in addition to the magnetic strip will increase your costs and timeline.
You also need to decide whether you’re going to get your own BIN or share one. The BIN on which the card is issued has to be tokenized too. Ideally this should be set up during the initial process of BIN sponsorship, but doing it later can extend your launch period by a few months. There are also legal agreements that need to be put in place with the wallets and the networks.
Getting your own BIN can take up to three months. Sharing a BIN takes a fraction of that time, and you can share a BIN that has already been tokenized. Typically, we recommend that fintechs share BINs because it’s easier, faster, and no less effective.
20. How long does implementation take with Treasury Prime?
Depends on your pace and how much work you've done before we get started (e.g. setting up a compliance program, mapping flow of funds, gathering financial projections and business plan, etc.) The process typically takes about 4 weeks.
21. What is the fastest card implementation Treasury Prime has done?
Using stock cards, we’ve done it in about 2 weeks.
22. How quickly can Treasury Prime issue virtual cards?
Issuing virtual cards is pretty instant. It’s the physical cards that take a bit longer because card networks require a review of your card designs. We have a lot of clients that use us for virtual cards. They’re easy to issue and you can issue a lot of them.
23. Do Treasury Prime’s virtual cards work with digital wallets like Apple/Google Pay?
24. Can Treasury Prime issue both debit and credit cards?
We issue commercial and consumer debit cards. Credit cards aren’t currently on our roadmap.
25. Can Treasury Prime open bank accounts for foreign companies?
Like many other things, it depends on your bank partner. We do work with banks that are willing to support foreign accounts, as well as non-US resident users. Send an email to firstname.lastname@example.org with more details about your use case and we’ll let you know if it’s possible.
To learn more about how Treasury Prime can help you build and launch a fintech product, get in touch with our team.