What is banking-as-a-service

The FinTech revolution of the last 10 years has created the ‘banking-as-a-service’ (BaaS) industry including companies like Marqeta, Nium, Modulr and Clear Bank. Recently, merchant acquirers like Stripe, Adyen and Checkout have also entered this market.

These companies make it faster and easier to launch a neobank or payments business by offering white label banking services such as holding funds, connecting to local payment systems and issuing cards.

Neobanks can also use cloud banking software providers such as Thought Machine, Form3 or Mambu. These providers offer technology and their customers need to operate the banking service themselves. This is still sometimes called banking-as-a-service because it is banking software operated as software-as-a-service.

Finally, global commercial banks like Citibank, JP Morgan Chase and HSBC also offer access to their banking services by API. They also call their services banking-as-a-service but they usually don’t target neobanks or payments businesses. They mostly target corporate customers who want to directly integrate banking services with ERP or Treasury management systems. 

The term ‘banking-as-a-service’ has therefore come to mean three slightly different offerings: 

• White label financial services for neobanks and payments businesses
• Cloud-based banking software for banks 
• Banking APIs for corporate customers

To add to the confusion, you will also hear the terms ‘embedded finance’, ‘embedded banking’ or ‘embedded payments’. How these terms differ from banking-as-a-service is explained in this article.

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What is open banking

Open banking originated from a push by payment regulators to make the financial services market more competitive by allowing anyone to give non-banks access to their bank account. 

Credit checking has been the most popular use case for open banking until now. Open banking allows credit providers to instantly check the credit worthiness of customers by getting access to their bank account history.

The ultimate goal of open banking however is to enable account-to-account payments (bank transfers). Regulators are keen to create competition for Visa, Mastercard and Amex by allowing consumers to pay directly from their bank account in shops and online. 

The most successful account-to-account schemes have been those where a single operator manages the service across all local banks. Examples are FedNow in the US, PIX in Brazil, UPI in India, iDEAL in the Netherlands and Blik in Poland. Strictly speaking this doesn’t count as open banking because access is managed by a single operator but it does achieve the same objective of making account-to-account payments competitive with cards. For example in the Netherlands, 62% of online payments are made using iDEAL.

What is the difference?

The difference between open banking and the different flavours of banking-as-a-service is explained in Figure 1. In this picture the orange arrow indicates the main difference with the column before.

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Open banking is API access to existing bank accounts for account balances and bank transfers only. The bank account owner has to login every time. The benefit is that this access is mandated in many countries so it works for every bank account in those countries. The downsides are that the user experience is clumsy because the user has to login every time and that it often doesn’t work for recurring or scheduled payments, card payments or direct debits.

Banking APIs provide API access to existing bank accounts but now for all banking services. The bank account owner also no longer has to login every time. The benefits are that the user experience is good and that all banking services can be offered. The downside is that it requires platforms to have a commercial relation with the customer’s bank which becomes problematic if they have many customers all using different banks. Other downsides are that today only a few banks offer this service and the ones that do all have different APIs making integration expensive. 

White label banking provides API access to new bank accounts for all banking services. ‘New bank accounts’ means the customer needs to create a new account to use the service. The benefits are that the user experience is good, that all banking services can be offered, that it requires only one contract and one API integration and that it works for all customers. Another important benefit is that wholesale banks will share the banking revenues so the provider can now earn money from banking services, in particular card payments, FX and interest on deposits. The main downside is that the customer has to transfer money to a new bank account and that some payments and compliance knowledge is required.

Cloud banking software is software used to operate bank accounts. The provider gets all the benefits of running a bank account (provided they also hold a banking license) but they also have to do all the work.

So which one is best?

Which type of service is best for you depends on what you want to do.

Open banking is great for companies needing to do credit checks. It is not so great yet for payments but the open banking providers and regulators are working hard on improvements. Open banking will never be right for platforms who want to earn revenue from providing banking services though.

Banking APIs may be right for you if you are a corporate customer and you want to integrate your existing bank accounts to your ERP system. It is not great if you are a platform and want to offer services to many customers. 

White label banking is the optimal solution for platforms wanting to earn revenue from offering financial services to their customers. It is also a good solution for neobanks who want to be 'asset light' meaning they want to focus mostly on customer acquisition and customer service and are happy to outsource most of their back office. Over time, I expect that some traditional banks will want to go asset light as well.

Cloud banking software is for neobanks that want to control their own back office and for banks that want to replace legacy on-premise banking software with cloud hosted software. 

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About Yordex

Yordex is a banking-as-service orchestrator. We make it easy for platforms to implement white label banking.

We connect to a global network of banking-as-a-service providers which allows our customers to use the optimal provider in every country. This improves payment margins by over 30% and gives global coverage and resilience. We also offer a range of value added software and services which reduces the time to implement white label banking by over 70%

For more information or a free-of-charge analysis of how much you can save by using a white label banking orchestrator, please contact us.

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What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.

What is banking-as-a-service?

The FinTech revolution of the last 10 years has created the ‘banking-as-a-service’ (BaaS) industry including companies like Marqeta, Nium, Modulr and Clear Bank. Recently, merchant acquirers like Stripe, Adyen and Checkout have also entered this market.

These companies make it faster and easier for platforms and neobanks to offer financial services by offering white label banking services such as holding funds, connecting to local payment systems and issuing cards. A detailed explanation of banking-as-a-service can be found here.

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What is embedded finance?

Embedded finance is integrating a financial service in a non-financial product. It includes embedded payments, embedded banking, embedded insurance and embedded investments.

Examples of embedded finance are:

• An e-commerce website taking payments and  buy-now-pay-later at the checkout (embedded payments and embedded lending respectively)
• An expense management or accounts payable platform offering credit cards and invoice payments (embedded banking)
• A digital advertising or affiliate marketing platform making card payments on behalf of their customers and offering their customers a credit line (embedded banking)
• A payroll software company paying employees directly (embedded banking)
• An employee relocation platform managing the entire relocation including supplier payments and allowances (embedded banking)
• A nonprofit organization disbursing funds to its beneficiaries by issuing cards and paying out on that card (embedded banking)
• A music royalty platform distributing funds from streaming services and venues to labels and artists (embedded banking)
• A travel website offering insurance (embedded insurance)

What is the difference?

As described here, the term banking-as-a-service is used broadly while embedded finance is only used in situations where the financial services is embedded into a non-financial service such as the ones listed above.

However, when looking in more detail, the situation gets blurry.

The first reason is that the products are similar. Embedded finance customers use white label banking providers but those providers also sell to regulated businesses. Embedded finance therefore doesn’t exist as a separate product.

The second reason is that there is nothing stopping non-financial services businesses from becoming regulated. For example, many retailers have financial services arms. We expect many embedded finance customers in other industries to do the same over time.

The only real difference therefore is the end-user experience: in embedded finance the service doesn't feel like a banking service. Then again, banking services 30 years ago felt very different from today so maybe in 30 years embedded banking will just be banking?

Does the difference matter?

No, it doesn’t.

Banking-as-a-service and embedded finance are here to stay. A recent research report by Market Research Future predicts the market will grow by 15% per year to $66 billion by the end of 2030.

Every business that deals with transactions or money should think of itself as a bank and seamlessly weave financial services into their product. This will make their services easier to use,  more sticky and more profitable.
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About Yordex

Yordex is a banking-as-service orchestrator. We make it easy for platforms to implement white label banking.

We connect to a global network of banking-as-a-service providers which allows our customers to use the optimal provider in every country. This improves payment margins by over 30% and gives global coverage and resilience. We also offer a range of value added software and services which reduces the time to implement white label banking by over 70%

For more information or a free-of-charge analysis of how much you can save by using a white label banking orchestrator, please contact us.

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What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.

The FinTech revolution of the last 10 years has created the ‘banking-as-a-service’ (BaaS) industry including companies like Marqeta, Nium, Modulr and Clear Bank. Recently, merchant acquirers like Stripe, Adyen and Checkout have also entered this market.

These companies make it faster and easier for platforms and neobanks to offer financial services by offering white label banking services such as holding funds, connecting to local payment systems and issuing cards. A detailed explanation of banking-as-a-service can be found here.

These BaaS providers are now starting to look beyond the FinTech market to also serve non-FinTech customers and with good reason. We believe that every business that helps is customers buy, sell or manage money should think of itself as a bank and integrate financial services into their services. Even larger businesses that make a lot of payments would benefit from using BaaS providers who are often cheaper and easier to integrate into software than traditional banks.

Why banking-as-a-service in its current form is not ready for non-FinTechs

There are however important differences between FinTechs and non-FinTechs:

• FinTechs have financial services knowledge and compliance teams in-house. Many non-FinTechs don’t have these skills.
• Most FinTechs are present in only a few markets. Many non-FinTechs, in particular businesses in the B2B software and service sectors are global
• FinTechs will process millions of transactions and can therefore spend more time integrating. Non-FinTechs may have much lower volumes and need a more out-of-the-box service

As a result, banking-as-a-service providers struggle to service non-FinTechs adequately. Their product assumes advanced financial services and compliance skills which means non-FinTechs need to bring these skills in-house which is time-consuming and expensive. They often also don't have the global coverage non-FinTechs need.

Banking-as-a-service orchestrators solve this problem.

What is a banking-as-a-service orchestrator?

A banking-as-a-service orchestrator fulfils a number of functions:

• Select and connect to multiple banking-as-a-service providers to offer global coverage and lower fees from using the right provider in every country and from strengthening their negotiation position
• Offer value-added services to make the service more out-of-the-box. These may include Know Your Customer (KYC) automation, payment reconciliation, payment scheduling and user interface components for banking and payment apps
• Provide compliance knowledge and help the customer meets its compliance requirements

This offers a number of benefits to non-FinTechs. Multi-sourcing banking-as-a-service providers increases payment margins by more than 30% while a single banking-as-a-service API and other value-added services reduce time-to-market and implementation costs by up to 70%. Savings from compliance support services are harder to quantify but hiring your own compliance team and putting in place company wide compliance processes yourself is expensive.

How to choose the right banking-as-a-service orchestrator

There isn’t a one-size-fits-all for banking-as-a-service orchestrators. You have to choose the one that fits your business. Here are some criteria to look out for:

Geographic coverage : an important reason to work with a banking-as-a-service orchestrator is their geographic coverage. Not every country in the world has a thriving banking-as-a-service market yet, but your banking-as-a-service orchestrator should be able to get you to at least 80% of your spend.

Sector knowledge : value-added services, training and compliance are core components of the banking-as-a-service orchestrator model and they differ by sector. At a minimum your orchestrator is specialized in B2B or B2C just like you but ideally they understand your specific sector and have worked in that sector before.

Savings analysis : a banking-as-a-service orchestrator should be able to explain how they will increase payment margins by more than 30%, ideally using a detailed country-by-country savings analysis.  

About Yordex

Yordex is a banking-as-service orchestrator. We make it easy for platforms to implement white label banking.

We connect to a global network of banking-as-a-service providers which allows our customers to use the optimal provider in every country. This improves payment margins by over 30% and gives global coverage and resilience. We also offer a range of value added software and services which reduces the time to implement white label banking by over 70%

For more information or a free-of-charge analysis of how much you can save by using a white label banking orchestrator, please contact us.

What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.

Today around 2% of B2B payments are made on card. This number is growing rapidly and Visa believes that around 20% of the B2B payments market is ‘cardable’.

This seems surprising, particularly for suppliers who are paying the high card payment fees. They’d rather use bank transfers or maybe switch newer payment options like open banking or cryptocurrencies.

In this article I will explain why we agree with Visa that cards have a bright future in B2B payments. We suspect some of the new payment methods may struggle if they seem to mistake cards’ strengths for weaknesses.

Let’s look at a few of these alleged weaknesses.

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Cards: when lack of security is a strength

Diners was the first ever credit card. It was launched in New York in the 1950s to allow diners to pay on credit. At that time, hackers did not exist and security was provided by security guards. While some security measures have been added since, they are still insecure: one tap or 16 digits is all it takes to pay.

However, as any security expert will know, perfect security does not exist. Good Chief Security Officers will spend most of their budget not on keeping hackers out but on limiting the damage hackers can do once they are in.

The same applies to cards. Credit card companies are forced to accept that fraud is inevitable. They therefore designed a system to limit the damage of fraud. This system includes financial institutions being liable for their clients’ actions and a mechanism to get back your money when fraud has happened (chargebacks). Compare that to APP fraud and crypto currencies where billions become irrecoverable every year despite the technology being more secure.

An additional benefit of the lack of security is the ease of use cards provide. It turns out that buyers like paying with just one tap or by just entering 16 digits. Ease of use is a big part of the success of cards.

Cards: when being expensive is a strength

I used to work at a large payments business where I regularly had customer councils with some of the country’s largest retailers. Invariably, the first 30 minutes of these meetings were taken up by those retailers asking us what we were doing to lower the card payment fees ('interchange').

Unfortunately, retailers don’t decide which payment method is used. Buyers do. Most of the card fees end up in buyers’ pockets either directly as cash back or points or indirectly as protection against fraud (the chargebacks I mentioned before). The remainder ends up in the pockets of card processors who use it to innovate and stay ahead of the new payment methods.

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Cards are here to stay

Cards aren’t all bad for sellers. Payments are approved in seconds and once approved, the money is guaranteed. This is particularly useful for B2B sellers. 43% of B2B invoices are paid late and businesses need to employ entire teams to chase payments.

At Yordex we help platforms, marketplaces and large buyers automate and save costs on managing large volumes of payouts. We are payment method agnostic, but like Visa we see cards getting stronger, not weaker. That is why we are extending our global network of card issuers.

‍

What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.

Managing small supplier spend remains a headache for most organizations.

The cost for onboarding suppliers can range from $1k-10k and sometimes much higher for Enterprise customers [1]. Even if we assume $2k that still means $1k per year assuming an average supplier lifetime of 2 years.

It is estimated that the average business spends $10 processing an invoice [2]. This analysis did not include PO approval and 3-way matching for which we will assume another $2. Finally, we need to amortize the supplier boarding costs. Taking a generous assumption of the supplier sending 6 invoices per month that more than doubles that cost to $25 per invoice.

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Corporate cards: better but not yet perfect

Corporate cards or P-cards are used for many of these tail spend payments today because they are convenient for both buyers and suppliers. 

For the supplier, P-cards allow them to get paid on time without having to chase their customers. This comes with a hefty card payment fee of up to 2.5% but that is sometimes still worth it for small invoices.

For the buyer, employees can use cards to avoid the overhead of the PO process while the finance team benefits from less time spent onboarding suppliers and matching invoices. Assuming the card payment is put through as an expense, we estimate that a card payment costs around $2 per supplier payment in people time compared with $25 for pay-on-invoice.

However, there are important downsides to cards for buyers

• Cards allow employees to bypass spend approval processes. They also allow employees to buy from non-preferred suppliers thereby missing pre-negotiated discounts
• Card statements lack the data required to analyze spend and sometimes also the data required for proper VAT filing 
• Due to the high fees, many suppliers won’t accept cards limiting the potential of using cards to reduce invoice processing costs

There must be a better way.

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The ideal small supplier payment process

The ideal small supplier spend payment process combines the ease of use of P-cards with the control and data of the PO-invoice process. We will call this the 'One Vendor' process for reasons explained in the next section.

Table 1: ideal small supplier payment process

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This process would give buyers the ability to:

• Have visibility over suppliers used
• Avoid supplier boarding costs for small suppliers
• Avoid PO/invoice matching for small invoices
• Negotiate payment terms including an early pay program

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For suppliers, it would:

• Avoid the need to have to chase customers for payment
• Offer low payment cost

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What this process looks like in practice

Similar to card payments, the buyer should receive a single statement or invoice every time period. Unlike card payments, that statement includes all the data the buyer needs for their accounting system: amount, taxes, supplier, line items and cost code(s). This data can also be used for spend analysis by the procurement team.

An important difference between this ideal process and card payments is supplier boarding. Card payments offer little information about and no communication with suppliers. Supplier boarding should be self-service to keep costs down for both suppliers and buyers.

At least one supplier still needs to be set up in your ERP system which will be the facilitator of the service. We therefore called this process the 'One Vendor' process.

Similar to the PO-invoices process, an invoice and/or justification of the spend is still required before a payment is released. However, unlike traditional invoice payments but similar to cards, approval by the employee is sufficient to release the payment on the (negotiated) payment due date.

Also similar to card payments, a supplier should be able to trust they will be paid on time. The payment provider guarantees timely payment just like card payment providers do.  

A final but important difference with cards are the payment fees for suppliers. The One Vendor process can work on any payment ‘rails’ (cards, bank transfers, crypto) and the buyer or supplier should be able to choose the payment method and fees that best fit their needs.

About Yordex

It is possible to implement this One Vendor process today. At Yordex we work with many organizations to drastically reduce their invoice processing costs while retaining control and visibility.

To find out more, please contact us.

‍

What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.