One could say that the payments industry hasn’t ever met a buzzword it doesn’t like – or pass up an opportunity to take one or two words, throw in a properly placed hyphen in between “at a service” and create one.
Although clever enough to remember, these buzzwords don’t always come with a standard definition, leaving that up to individual interpretation.
Distributed banking, aka banking-as-a-service, is an example that comes to mind. A distant cousin once or twice removed from open banking, Ingo Money CEO Drew Edwards told PYMNTS CEO Karen Webster that the two couldn’t be more different in a recent conversation about the topic.
Edwards said that open banking is mostly about moving information, not about moving money between a consumer, her bank, and a third party, like the Robinhood app — at least for now. That data exchange makes it possible for a FinTech to step into the middle of the transaction but also makes the bank little more than the “dumb pipes” that serve as the funding source.
Distributed banking, Edwards told Webster, is a very different concept — one that makes banks a very strategic part of the exchange of money and data between a consumer or a business, a FinTech and a third party.
“[Distributed banking] means being able to, as a bank, enable banking services to be pushed through their corporate clients to their end users — as many end points as possible,” he said. “Banks aren’t invisible, but the FinTechs that may be a part of enabling the transfer of data on behalf of the bank are.”
By way of example, he said, distributed banking is the ability of a large insurance company to tap their treasury bank to provide payout options to their end customers — consumers or small businesses — where the treasury bank is powered by a FinTech (in this case Ingo) that is the invisible disbursements engine. No one is disintermediated, and the treasury bank has an opportunity not only to push a new payouts services to its corporate client, but also enable other banking services to those end users.
Edwards believes that distributed banking capabilities, as provided by Ingo and other players, give traditional banks the chance to compete with the FinTechs rather than being disrupted by them.
“Many of the successful FinTechs, think of Square, Venmo, Robinhood, Stripe, PayPal, these are disruptors that have all designed and built their own ecosystems and created the relationship with the end user,” Edwards said. “When you sign up for Venmo, you sign up for Square, you sign up with them, it’s their relationship — and consumers send and receive money completely outside the traditional banking ecosystem.”
Keeping Hold Of The Customer
The massive wave of FinTech acquisitions, partnerships and efforts to standardize the data exchange between banks, their customers and FinTechs, Edwards said, is clear evidence that banks now realize how high FinTechs have raised the bar on customer expectations. And how high now banks must reach to operate at parity with them if they don’t want to be relegated to the position of a funding source for FinTechs that consumers and businesses turn to to get the job done.
In response, some banks are moving those tech stacks in-house to keep control of the relationship and the transaction. The challenge, Edwards says, is that banks aren’t set up to enable many distributed banking use cases that their corporate customers now require to satisfy their end users.
“Banks are hard-wired for a very defined engagement with their customer — ‘pay someone a thousand dollars tomorrow,’ ” he said. “They’re not designed to reach through an insurance company’s end user customer base, take on the risk of authenticating that end user, offering them a choice for how they want to receive a payment, pay the end user in that way and manage the whole process, including enabling the insurance company’s customer services operations to have the data to tell their customers where the payment is in the process.”
Enabling Bank-Centric Distributed Banking
Edwards explained that Ingo is one of the FinTechs helping to enable distributed banking for banks and their corporates without stepping into the end-user relationship. Receivers not only don’t sign up with Ingo or establish an account with them, they actually can’t. Ingo isn’t a licensed money transmitter; its purpose is to authenticate the receiver to make sure that they are using one they own, then direct the payout to one of 30 payment endpoints that the receiver might wish to activate. To that receiver, Edwards said, Ingo is basically an invisible party powering the flow behind the scenes — working in partnership with the bank that funds the payout, the corporate that has disbursement payments to make and the end user who wants their money.
“We are helping to bring all of that [distributed banking capability] back into the bank so that they can push payments and banking services to a variety of new endpoints. This works for the big treasury banks because it’s not a threat to them.”