When fintech insiders talk about embedded finance, we often focus on companies offering financial products on platforms and or other services. It’s easy to miss just how much work goes on behind the scenes, to make those features possible.
And yet, one of the fastest-growing, most innovative sectors in fintech is banking-as-as-service (BaaS) or API-based middleware. These B2B players provide the hidden plumbing that makes it easy and fast for third parties to embed financial features (such as payments, credit and checking) into their offerings.
“These infrastructure providers are actually unsung heroes, doing the heavy lifting on core operating and compliance functions,” said Flourish Venture Partner Sarah Morgenstern in a July 14 online panel discussion. “Embedded finance grinds to a halt if you don’t have the right plumbing.”
The second in Flourish’s 2021 Embedded Finance Series, the panel followed an earlier discussion on Platforms, and featured the leaders of pioneering infrastructure fintechs in three key markets:
- Doug Storf, Founder and CEO of SWAP
- Amanda Swoverland, Chief Compliance Officer of Unit
- Madhusudanan R, Co-founder and CEO, YAP
Flexibility for Fintech Innovators in Brazil
The inspiration for many of the best BaaS solutions comes from fintech founders – all the pain points of trying to connect to legacy infrastructure; the struggles with contracts and compliance.
Before founding SWAP, Doug and his team worked at 99 Taxi and ran into all those pain points. Trying to build a digital wallet for the Brazilian e-hailing company, they could not find a payments or banking partner. The B2B market was only served by incumbents, with outdated connections to card schemes.
“The card processors were built 10 to 15 years ago for a different purpose,” said Doug. “They did not have the flexibility or the controls for new use cases. No one had APIs. So, we decided to build exactly the product we would have hired.”
They built SWAP to make payment rails and banking services more accessible. A hub for business to connect to the financial ecosystem in Brazil, SWAP offers digital wallets, payment processing, card issuing services, and APIs.
Rather than e-hailing, SWAP’s first customer was a fintech firm enabling flexible employee benefits such as meal vouchers on prepaid cards. “That’s only possible if you build the entire infrastructure behind it,” said Doug, “connections with card brands and banks, money safely in and safely out.”
SWAP started by developing white label infrastructure services for this vertical, then expanding into other areas of fintech, such as lending. “Our approach was to understand our clients’ needs and ask what we can take off their plates,” said Doug. “We built for multiple uses cases, providing more flexibility, to enable innovators to focus on their core business.”
Speeding U.S. Fintechs’ Time to Market
That flexibility is also important to Unit’s success with fintechs in the U.S. The BaaS provider prioritizes easy-to-integrate technology, carefully selected bank partners, and a compliance-first focus.
“We’re serving emerging industries in the gig economy as well as industries that have been around for years, across many verticals,” said Amanda. “Our technology stack is flexible to meet all these different use cases, so [fintech founders] who don’t necessarily have any banking experience can get a product to market in less than 60 days.”
Clients use Unit’s APIs for ledgers, core processing, KYC, compliance, fraud, and security. And Unit has the banking relationships and products already in place.
“I love the compliance part of it, so you don’t have to be an expert in regulations,” said Amanda. “The amount of friction for a company going directly to a bank could be millions of dollars and 12–18 months. At Unit, we like to think of ourselves as the easiest way for a company to stand themselves up. We have the pipes, and we take care of the heavy lifting.”
Building on the India Stack for Easy “Lego Banking”
The proliferation of fintech infrastructure has been even more dramatic in India, with providers like YAP building connections to the India Stack. From its 2014 launch, YAP has grown into a suite of banking and payments products in several markets across Asia.
“In India 15 years ago, financial services used to be a luxury, now they’re a necessity,” said Madhusudanan. “We’ve been on this journey of giving access to everyone. With the infrastructure capabilities from the government side, it’s becoming a utility, where new products and services are coming in and chipping away at different needs and customer segments.”
YAP connects fintechs and digital platforms to incumbent banks and public infrastructure such as the Unified Payments Interface (part of the India Stack). YAP offers bank APIs for checking and savings accounts, debit, credit, prepaid, QR codes and other payment methods.
“By working with us, fintechs don’t have to deal with the banks,” said Madhusudanan. “We worked with the banks to put these processes and technology in place, and make this into a cookie cutter model, where any fintech can churn out products in six weeks that would have taken six months.”
With all the pieces in place, YAP focuses on co-creating solutions with fintech customers. “We call it ‘Lego banking,’” said Madhusudanan. “If you think of infrastructure as just pieces of Lego, its left to fintechs’ imagination to keep iterating and actually create.”
From Banking-as-a-Service to Open Banking
Like with the India Stack, governments are kicking off new waves of fintech innovation in many markets around the world. In Brazil, Doug said he sees central bank reforms leading to a new revolution.
“The instant payment infrastructure in Brazil and the open banking regulation are basically giving the right to the information back to the user,” said Doug. “And a lot of new business models will merge from there. We’re going to see a lot more connections between different pipes. So it’s a shift from who holds the money to who has the information.”