Updated: Dec 8, 2022
When I was leading the product team at Bond, my vision was to significantly lower the barrier to entry for brands to embed financial services into their products.
What does this mean?
Imagine you are a product manager at Nike, responsible for the online e-commerce store. What are the ways you could increase sales and distribution of footwear products? Common answers might be:
My theory was that there was a >$20BN opportunity for large brands such as Nike to offer financial services to their loyal customers.
Imagine this, a lucky teenager is gifted their first pair of Air Force 1's, and inside the box is a QR code to create a Nike wallet. The pair of shoes comes with a checking account, and she gets rewarded through the Nike app for having good financial habits. And those rewards could be used to buy her next pair of shoes.
It has been two years since that vision was dreamed of, and we are still far from achieving it.
For that product manager at Nike, despite the accessibility of APIs and integration times now as short as a couple of weeks, these kinds of projects just don't get prioritized.
How about FinTech startups and tech-enabled innovators? I want to spend the rest of the article exploring my journey trying to use BaaS (after years of being on the building side).
I've been working on this article for over several weeks now. There's so much I have written and wanted to share. In this process, I want to respect all hardworking founders and team members who are toiling away at building these infrastructure products.
When I was ready to publish, I realized I had written many words about how I got into FinTech. My passion for banking infra was important, so I extracted that part and published it as a separate post. It is a helpful prerequisite to continue reading but not required.
Here are some concerns faced by founders considering using a BaaS provider.
So as a founder, do you BaaS or not? Depends on what you're building. If you're creating tools/services for the banks themselves, as described in the thread below, you might be best served to go directly to a bank.
As a founder, if you're building a consumer or B2B FinTech product, you can't necessarily go to the bank as they might not be fast enough or capable of serving you.
This is the BaaS sweet spot - speed to market and various financial products under a single, developer-friendly API. Let's explore this further.
In January of this year, I started the journey of transitioning from idea to execution on one of our NimiX accelerator projects: Nimi Kash.
Quick shameless plug: Nimi is a premier product development agency. We specialize in building API services, enterprise web applications, and self-service developer platforms. We also implement and maintain API and web test automation frameworks. We have a lot of experience in FinTech. We'd love to send you a few case studies after a brief chat. Schedule a conversation with our team today.
The vision behind Nimi Kash is to put as much money into the wallets of Sri Lankans and provide them with the tools to improve their financial wellness.
Even though the government fixed the exchange rate to be approximately $1 = 200 LKR (Sri Lankan Rupee), the cost of imported goods continued to increase, and buying power was reduced. When the central bank let the Rupee float, the currency lost more than 44% of its value, causing an inflation spike and an economic fallout everyone worldwide has heard of by now.
We foresaw this happening, so our mission was to pay our employees in a foreign, more stable currency such as USD. Our approach was to create a "USD" wallet for our team members where we could deposit their salary in USD, and they could spend their earnings on a card or convert them to LKR for cash expenses by partnering with an ATM network.
In my mind, we had a trivial solution. I would partner directly with a BaaS provider and offer a neobank for IT professionals called Nimi Kash.
Most of the BaaS vendors are fairly young, and it would be fair to say that what they offer is a function of what their banking and technology partners offer. Especially when it comes to types of financial products and the risk appetite, the sponsor bank(s) pretty much dictate it.
In the future, this might change, as the BaaS platforms have a significant customer base and can pressure the sponsor banks to make changes for the better of the ecosystem.
Nevertheless, after speaking with 18 BaaS vendors, I could only get two to agree to work with me, with significant cutbacks in the MVP scope making the product less compelling.
One of the BD leaders Thomas Kang, gave me sage advice:
What you are trying to do is an "impossible" challenge. I want to help you build this. But you must break them down into smaller chunks. Build one piece at a time. Little by little, you will learn as you progress.
That's the key part here - learning. Over the rest of this article, I want to share with you my learnings.
Below are the major roadblocks I faced as I designed my solution over the last three months.
Here's a perfect example of where the "middleman tax" can thwart innovation. It stems from the fact that very few providers completely own the stack (they use other vendors and, in some cases, use each other), so the cost basis is higher.
Since writing this article, I received some great ideas for what I could do to continue building within the constraints of the existing US banking infrastructure.
Here's what Adam Gering from LexDAO had to share:
You can generate a Series of a Delaware Series LLC and reduce the cost for a US legal business entity with EIN to a free IRS form. But a 2007 change in US tax law means the non-resident owners must file IRS Form 5472 with a Pro-forma Form 1120. Alternatively, a Money Services Business (MSB) creating accounts for non-residents is no problem. The funds are omnibus'ed with financial institutions. A fintech without its licenses (non-MSB) has to rely upon another financial institution to create end-user sub-accounts (or sub-ledgers).
According to Grimes Law PLLC, the costs of being an MSB (in all states) start at $180k, with an ongoing $140k commitment. Certainly cheaper to work only a few states, and you will need additional funds for the surety Bonds. As you will find later in this article that some BaaS providers will be cheaper than this.
Shaul David at Railsr suggested that I could work with an EU provider and get my own EMI rather than relying on the US banking infra.
"The upside of standing up an international program with potential geopolitical risks vs. spinning up a national program doesn't make sense for most BaaS players in the current market. I'd say that... most US Banks would come to the same analysis. Too many unknown risks with an unknown reward." said Marcus Lobendahn at Bond.
Marcus had a solid point, and I wanted to explore this further. The sticking point was the BSA rules to mitigate risks in Account Opening (AO) fraud. Rules state that to KYC, a user; this information must be provided to the bank (or their vendor) for verification and monitoring purposes:
As an employer in Sri Lanka, law states that we need to collect all the above information about our employees, including creating an HR file that contains:
*Anyone in Sri Lanka 15 years or older must have a NIC. All activity for citizens is tied to this number, from getting a phone number to opening a bank account or applying for a passport.
As you observed in the previous section, one workaround for us to work with a BaaS provider is to create dummy LLCs or EINs to pass KYC.
What would you prefer to have as a compliance officer at a US bank? Dummy LLCs, or access to verified identity data that users are happy to provide to access financial services out of their reach?
This is where the global banking system has fallen short. It wasn't designed to be "borderless"; as a result, innovators are struggling to piece together solutions that give access to the global underserved population.
I've heard this term thrown around quite a bit. Who am I kidding? I've said it so myself.
But it is just not true.
Below you will find my monthly billing for a small web app I created. The app works fine, accepts visitors, creates accounts, stores some basic customer information, and has been running satisfactorily for the last few years. Keeping this site running costs me a little over $1 monthly.
No BaaS provider can give a barrier to entry as low as this because the regulatory red tape and parties involved add complexity and cost.
So what does BaaS cost, and what do you need to know?
Note: I have decided to anonymize the below providers. Given the nature of the business, it is only fair that I do this.
*Some providers have an onboarding fee of $20,000 to $25,000.
So, the question again. What does BaaS cost? For our use case, it could range from $80,000 per year to almost $7MM per year.
Without interchange as a potential revenue model for us, and given that we are a bootstrapped company, we had to think of a different solution for our product design.
Within the first 12 hours of sharing this article, I had a few slacks, emails, and text messages stating that I was taking a dig at the entire BaaS industry when the limitation really comes from the global banking ecosystem and the way the card networks (Visa and Mastercard) apply regional constraints on the use and distribution of card products.
So it was only fair for me to provide a brief buyers guide for when BaaS does indeed work, and what you should look out for when buying.
If you are a growing brand or a tech-enabled innovator building a product for the US market, you will find that you have no choice other than BaaS. Why?
So if those above criteria apply to you, what should you be looking for to pick the right BaaS partner?
I'm confident those questions will help you find the right BaaS provider to go with.
I hoped that by late 2022, BaaS providers could enable Products like Nimi Kash.
I think too many BaaS companies were funded in a short window. So they had to compete heavily with each other rather than putting their heads down and building.
Since they couldn't differentiate on the tech, they have differentiated on the variety of banking partners, developer experience, and strength of their sales, marketing, and operations teams. All this costs money that shows up in the platform fees.
As a result, there is quite a long way for them to go to enable small companies like us.
Until then, they will continue to focus on larger VC-backed companies. They will work hard to educate brands like Nike to consider embedded finance. As the adoption grows and each BaaS player claims some turf, the costs decrease. I still believe in BaaS very much, and Shamir was right; I'll need to wait a few more years to see this happen.
For us here at Nimi, we are determined to build Nimi Kash. We haven't given up. We must find our path there.
I'm looking forward to sharing our progress in a future post.
Dilip Ramachandran has over 15+ years of building teams, shipping delightful and highly successful enterprise software products in MarTech and FinTech at companies like Walmart, Experian, Marqeta and Bond.
Dilip wrote Gangsta Vision to help folks in product management to figure out their path and a plan to break into senior leadership.
At Nimi, Dilip is CEO and Chief Product Therapist helping high-growth FinTech startups with product and payments advisory and matching them with highly reliable and skilled experts in Sri Lanka. Learn more about Nimi at www.nimidev.com
Dilip has a Bachelor’s in Electrical Engineering from the University of Pennsylvania and resides in Oakland, California with his partner Alla, daughter Ariadna and son Wiley (a papillon-sheltie rescue). The family occasionally travels to Colombo, Sri Lanka for his work with Nimi.