Traditional financial institutions (FIs) will be the critical ingredient for embedded banking software platforms to create new operating systems for enterprises, he said — particularly small- to medium-sized businesses (SMBs).
“It’s exactly the right time, right now, for embedded banking because it’s a real revenue generator for the banks and for corporates,” Dean said.
Enterprises are taking a more significant role in how banking is done in the United States, he said. There’s a long runway of growth ahead for nonbank companies (enterprises, software firms and the FinTechs serving them) to offer financial services to end users, spanning bank accounts, digital wallets and access to credit.
Those enterprises understand their individual consumer or business customers better than anybody else — and they can boost top-line momentum by enhancing the value proposition for the markets they already have in place rather than targeting new markets for growth, he said.
“If these firms are going to serve their customers in the best possible way, they will need to provide them with banking services,” said Dean.
A software company, for example, that focuses on lawyers may want to add payments into the mix. A construction company would likely want to have seamless ways of paying vendors. By creating more seamless experiences, the software providers and FinTechs fashion operating systems for their chosen verticals.
These are more complicated flows than a program like QuickBooks can handle, and smaller firms don’t have in-house finance departments to manage cash flow more adroitly. For forward-thinking Software-as-a-Service (SaaS) providers, the opportunity is there: Add a button that says, “create a bank account,” and people will click that button.
“But to do all this,” he said, a bit tongue in cheek, “trust me: you do not want to become a bank.”
The financial services landscape is a fragmented one, marked by an alphabet soup of regulators, a complex (and changing) set of regulations and thousands of FIs that hold the accounts themselves.
To make embedded banking and embedded payments a reality, he said, “the banks are the ones who hold the cards economically, and if you want to do anything interesting [with embedded banking/payments], you have to have great partnerships with the banks.”
The banking relationship is critical, too, as compliance and fraud prevention must be in place no matter what products and services are on offer. The banks excel here, he said.
Why Banks are Critical
“You can’t sidestep the banks,” he said, with a nod toward regulation. “They’re the ones that hold the charters, they’re the ones that have been doing this for hundreds of years. You simply cannot outsource the compliance.”
Although the greenfield opportunity is significant for embedded banking, there are headwinds gathering. Dean noted that amid the uncertain macro environment and rising wave of fraud, compliance and regulations will only become more challenging. The heads of the Consumer Financial Protection Bureau (CFPB) and other agencies experienced the financial crisis of 2008 firsthand and are leery of the risks inherent in areas like shadow banking.
“What’s going to happen is that, in 2023, there will be more regulations to promote transparency — and lots more vendor due diligence,” said Dean.
There will be additional oversight of money movement between accounts and liquidity. The FinTechs, he said, will either fix themselves or struggle to find new banking relationships. And, he added, “the point of our software is to make it easier to follow the rules.”
Conversely, there are few things the banks are not all that good at, said Dean. They don’t understand the day-to-day needs of corporates as well as SaaS firms. They’re not great at building software products that people actually use. Thus, they need the expertise of providers such as Treasury Prime to deliver the technology and the FinTech connections that in turn will help boost deposits and transaction-based revenues.
“We provide these services to banks,” said Dean, through application programming interfaces (APIs), “which they can use, and we can use, to connect them to the enterprises because they have to work together.”
The platform model, he said, leverages the strengths of both the banking and the FinTech sides of the ecosystem.
Looking ahead, embedded banking and the rise of Banking-as-a-Service will appeal to firms across all verticals, especially the smaller firms that power the U.S. economy that need to run their businesses more efficiently and increase sales.
“The trucking company, the construction company, the dentist office and the restaurants are all happy with these solutions,” said Dean, “and the banks love embedded banking because they tap new markets and get direct deposits they otherwise wouldn’t get.”