By: Miles Schwartz, CEO at Zum Rails
Starbucks is sitting on close to two billion dollars in unredeemed gift card balances, which means if the company wanted to become a bank, it would rank amongst many established organizations. But Starbucks is a coffee shop, not a bank.
In a similar vein, there is the retail investing platform Robinhood. What was once only an application that let consumers invest in securities has evolved over the years, rolling out debit cards that allow customers to spend their account balance, interest-bearing accounts, and even a new credit card offering. To many, an institution that offers customers a safe place to store their money, ways to invest their money and ways to spend their money is a bank.
But as Robinhood states, it is not a bank – it is a fintech company. As a result, they are not subject to the same level of regulatory scrutiny as a bank. Robinhood is just one example–people use single-purpose financial services providers every day to pay their friends, budget, pay off loans, send cross-border payments, build their credit and more.
These are large companies, though. Now, smaller and mid-size companies that offer a single financial service, such as personal loans, are viewing bank-like services as an attractive model that allows them to offer their existing customer base new products that create new streams of revenue. But many companies will write off this expansion as too much work or not worth the cost.
The good news is that while becoming bank-like requires initial investments, there is a tried-and-true blueprint that other companies have executed, allowing them to expand their products and services, diversify their revenue streams, and ultimately grow their businesses. And today, especially for smaller companies, becoming bank-like does not require the same financial resourcing as it once did.
Here, we will walk through the blueprint, including all of the components companies need to consider when they want to make the shift from just another single-purpose fintech provider to an all-in-one platform for their customers to manage their funds.
Digital account balances enable customers to store their funds.
The first step to giving customers new ways to use their money is providing a safe place for them to store their funds. For example, even though Venmo is a peer-to-peer payments app, it allows customers to keep funds in their Venmo accounts and pay for goods and services outside the Venmo app through various methods.
Creating a digital wallet, or a place for customers to store their funds embedded into existing systems, allows the company to provide customers with a secure, branded place to manage their money. Not only does this deepen the customer’s relationship with the brand, but it also delivers added value for the company.
By enabling customers to hold funds in a digital wallet, companies can charge fees for premium services, such as instant transfers to a bank account, which ultimately helps the company’s bottom line.
Payment rails power profitable money movement.
The driving force behind these wallets should be the ability for customers to fund their wallets with their bank account and move funds back to it. Since payments are the lifeblood of every business, most already have a payments provider. This makes it easier to expand into offering bank-like services, as the business can rely on its existing payments infrastructure.
Additionally, payment providers typically offer several rails for immediate money movement or for transactions that take a few days. These different types of rails can help businesses offer different speeds to their customers when they want to load or withdraw money from their accounts.
Most payment providers also have built-in risk management controls, such as know-your-customer checks, to ensure that the person making the transaction is who they claim to be. This can help reduce fraud and make payments more reliable at scale.
Cards are where companies can drive the most value.
Going back to the Starbucks example, the most limiting part of their gift card program is the fact that customers can only spend their money at Starbucks. This is different from, say, the Cash App debit card issued on the Visa network that allows customers to spend their Cash App balances anywhere they want.
Issuing cards directly, with the company’s branding, is what truly makes a company act like a bank.
Additionally, with cards, businesses can develop entirely new business models or offerings, such as credit repair and secured cards that let those with a spotty credit history build their credit portfolio. This can help companies not only offer new services to their existing customer base but also attract new customers.
Traditionally, issuing cards as a non-bank required working with a bank and paying a six-to-seven-figure fee, accessible only to large enterprises. But now, other providers in the market offer cards at a rate that is accessible to small to medium-sized companies.
The investment does pay off in the long run once the card program is generating revenue, but it requires an initial investment up front. Additionally, switching providers tends to come with a high cost as well, so in the search for providers or banks, you need to work with someone who will serve the company long-term.
How to launch card-based offerings.
To achieve these capabilities, companies have two options: either work with each payment rail and risk management provider separately, or use an all-in-one system. For larger companies with a significant amount of transaction volume, it might make sense to negotiate the rates with each provider, but for small to mid-size companies, working with an all-in-one provider can save you the headache of needing to work with dozens of different fintech providers and banks.
The opportunities for companies that want to become more like banks are immense – but first they need to build the infrastructure that powers account balances, payments, cards and more. Once the infrastructure is built and companies begin rolling out the offerings to their customers, they will set themselves apart in the market and create a path for growth.
