It is easier than ever before to build and launch a card product thanks to the development of fintech infrastructure companies. However, amidst this convenience lies a critical strategic decision that companies must make: Should they partner with a Banking as a Service (BaaS) provider, opt for full-scale infrastructure development and transformation into a fintech entity, or consider a hybrid approach that combines the strengths of both?

Understanding the best path for a company considering launching a new card program is one of the most critical strategic decisions surrounding the degree to which your infrastructure will be owned in-house. This choice can significantly impact a company's operational efficiency, customer experience, and overall market competitiveness. In this feature, we'll explore when each path makes sense, critical providers in the space, the risks and rewards associated with each decision, and who is best suited for embedded finance.

Comparing the options

BaaS providers have become increasingly versatile as the financial technology landscape evolves, blurring the lines between traditional financial institutions and tech-driven startups. Companies exploring card program options encounter a spectrum of BaaS providers. On one end of the spectrum, some BaaS providers offer comprehensive solutions that encompass everything from issuing cards and managing compliance to delivering a seamless customer experience. Conversely, some providers specialize primarily in processing transactions, serving as the underlying financial infrastructure while allowing companies to retain greater control over the rest of the operational stack. This diverse range of BaaS offerings creates a “gray space” that companies must navigate when deciding how deeply they want to integrate with these providers to meet their card program objectives.

This spectrum is not clearly divided between its two ends. Instead, it is very fuzzy as each provider has its own model, and some fundamentally support both. To help illuminate this, we will focus on the far ends in defining the possibilities, acknowledging that many providers provide some flexibility.

Embedded finance: A plug-and-play solution

Embedded finance shines in scenarios where businesses seek to offer financial services without the complexities of building and maintaining their infrastructure. It's ideal for non-financial companies looking to add value to their existing offerings, such as retailers introducing branded payment cards or service platforms integrating payment processing.

Even if you are a fintech company and cards are not your primary product, embedded finance can vastly accelerate your launch and minimize operational costs (at some expense of long-term revenue). 

In technical terms, Banking-as-a-Service providers that offer a full-service product are known as program managers. The program manager is ultimately responsible to the issuing bank for the card program, and the brand that offers the card is known as a “co-branded card partner.” While many startups would like to say they run their program in the technical sense, using a Banking-as-a-Service solution, they are not.

When you work with a program manager, they are responsible for critical items like Know Your Customer (KYC), Anti-Money Laundering, Bank Secrecy Act, and fraud prevention processes. You may be able to participate in the authorization workflow (known as “cooperative auth”) or design your own plastic cards. Still, the BaaS provider holds and maintains the system of record and most (if not all) third-party contracts.

Use cases where embedded solutions shine

  1. E-commerce platforms To seamlessly integrate payment processing or offer branded credit cards. For example, an e-commerce giant can partner with Stripe to provide customers with a convenient payment experience.

  2. Tech startups Looking to add financial services to their offerings without deviating from their core technology focus. A tech startup specializing in food delivery may use an embedded finance solution to offer customers prepaid cards for ordering food.

  3. SMEs (Small and Medium Enterprises) Small and medium enterprises can leverage embedded finance to offer customer loyalty programs with minimal investment. A local retail store might partner with a platform to issue loyalty cards to frequent shoppers, enhancing customer engagement.

  4. B2B SaaS A business-to-business software-as-a-service company can embed a checking, charge, or credit card into their core platform, enabling their customers to build and manage their business all in one place easily. 

Benefits of embedded finance

  1. Quick market entry Embedded finance facilitates swift market entry, allowing businesses to capitalize on the demand for financial products without lengthy development timelines.

  2. Reduced operational complexity Building and managing financial infrastructure can be cost-prohibitive for smaller companies with limited resources. By leveraging specialized providers, companies can simplify operations, reducing the burden of financial service management.

  3. Access to advanced technologies Embedded finance providers often offer cutting-edge technologies, ensuring businesses stay competitive in the rapidly evolving fintech landscape.

  4. Focus on core business functions rather than financial service complexities Businesses often excel in their core domains, e-commerce, technology, or retail. Embedded finance allows these companies to concentrate on their strengths while partnering with specialized providers for financial services. This strategic focus can lead to greater overall success.

Example providers for embedded finance card solutions

  • Bankable

  • CapitalOS

  • Stripe

  • Synapse

  • Unit

  • Highnote

Risks of embedded finance

  1. Dependence on third-party providers Relying on external partners for critical financial services can introduce vulnerabilities, including potential service disruptions.

  2. Limitations in customization While convenient, embedded finance solutions may come with limitations in customization, limiting the ability to differentiate offerings.

  3. Data security and compliance concerns Entrusting customer data to third-party providers necessitates robust security and compliance measures to mitigate risks.

Owning your infrastructure: The customized approach

Owning your infrastructure is well-suited for organizations with the resources and desire for complete control over their financial services. Established financial institutions or fintech companies often choose this path to offer customers a unique, tailored experience.

In contrast to embedded solutions, a complete approach to building your own infrastructure means vetting, selecting, and integrating many vendors, such as:

  1. Core processing

  2. Ledgering

  3. Loan management (if applicable)

  4. KYC providers

  5. KYC workflow

  6. AML monitoring

  7. OFAC monitoring

  8. Sanctions monitoring

  9. Fraud monitoring

  10. Card printing and manufacturing

  11. Card personalization

  12. PCI Vaulting

  13. Dispute processing

  14. Customer care and support

Again, many core infrastructure providers will provide more than one of these services. Still, as they are not the program manager, the company providing the solution to the end user is their own program manager and defines all workflows and policies, subject to their issuer’s approval.

In particular, a few examples, such as Highnote, Lithic, Galileo, Qolo, and i2c, offer core processing and program management services (not all in all contexts). You can process on i2c and use their KYC solution, or process on i2c and bring your own KYC solution. For a company like Lithic, you can start with Lithic as the program manager and migrate to being your own program manager.

Some BaaS providers, on the other hand, provide only program management (e.g., Unit, Synapse, Apto) and do not offer stand-alone core processing.

Situations where owning infrastructure is beneficial

  1. Need for highly customized card services Some businesses require intricate, tailor-made financial solutions. For example, banks and fintech companies serving a niche market may own their infrastructure to ensure their offerings align precisely with their customers' needs.

  2. Large customer base with specific financial needs Established financial institutions with a substantial customer base may prefer owning their infrastructure and maintaining control over every aspect of their customer's experience. Customization becomes paramount in meeting the diverse needs of their clientele.

  3. Willingness to invest in long-term infrastructure development and maintenance Companies committed to long-term growth and innovation may invest in developing and maintaining their financial infrastructure. While this requires substantial resources, it can lead to a competitive advantage and unique service offerings.

Benefits of owning your infrastructure

  1. Complete control over customer experience Owning infrastructure provides unparalleled control over every aspect of the customer journey, ensuring a tailored and consistent experience.

  2. Ability to create bespoke solutions Businesses can craft highly customized financial solutions that meet their customers' unique needs, fostering loyalty and retention.

  3. Direct management of data security and compliance Companies can directly oversee data security and compliance with in-house control, reducing potential risks.

Example infrastructure providers (core processing)

  • Corecard

  • Galileo

  • Highnote

  • Lithic

  • Marqeta

Risks of owning your infrastructure

  1. High up-front investment Building and maintaining financial infrastructure entails substantial upfront costs, which may only be feasible for some businesses. We estimate the startup cost on a BaaS platform to be as low as $20,000 in fees vs. $250,000 as a stand-alone build.

  2. Need for ongoing maintenance and updates Keeping infrastructure current and compliant requires continuous investment in resources and technology.

  3. Longer time-to-market for financial products Developing in-house solutions may result in longer time-to-market, potentially missing out on immediate opportunities.

  4. Complex set of vendor relationships It can take ten to twenty vendor relationships to build your own program, depending on your configuration, from the core processor to the card manufacturer to compliance services. Vendor management becomes a full-time role and requires a lot of legal work.

Conclusion

The decision between embedded finance and owning your infrastructure for card services depends on various factors, including your company's size, resources, and long-term strategic goals. While embedded finance offers a quick and resource-efficient path to introducing financial services, owning your infrastructure provides unparalleled control and customization. Understanding your business needs and market demands is crucial in making an informed decision that aligns with your company's vision and customer expectations.

Whether you opt for the plug-and-play convenience of embedded finance or the customized control of infrastructure ownership, the fintech landscape offers diverse opportunities for businesses to thrive and innovate in the financial services sector. Careful consideration of your objectives and resources will guide you toward the path that best suits your business goals.

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