APIs Turn Businesses Into Banking Services Providers in Weeks

Macro headwinds aside, embedded finance is poised for long-term growth.

Itai Damti, CEO of the Banking-as-a-Service platform (BaaS) Unit, told PYMNTS that BaaS and embedded finance models would change the banking, payments and retail dynamics.

Short term, the evolution of any ecosystem depends on the availability of capital and the economy’s health.

But, when looking out over the next 10 years, he said, “if you really think about the number of dollars that are out there in the world today, and you think about the value that software products give us as consumers and businesses every day, to me it’s inevitable that a large portion of these dollars over time are going to find their way into software that’s going to be automated and streamlined and more convenient to use.”

At a high level, that convenience will only be heightened as embedded finance connects non-financial service firms — a retailer, for example — with banks. Those non-financial firms can offer everything from bank accounts to cards and other payment products as part of their existing software and platforms without obtaining a banking license. Conceivably, any tech company, regardless of vertical, can be a tech firm and financial services provider.

He said that through the last several years, companies that have developed software solutions “have spun the flywheel of distribution, trust and data.” Those firms now have the chance to take their existing client bases and add value by providing software and adding money storage and movement to the equation.

“This is a natural evolution,” he said, “and the ecosystem’s going to be massive in five to 10 years.”

In connecting non-financial firms with banks (and BaaS), he said, some advantages accrue to the “supply” side of the ecosystem (that’s the banks). The banks, he said, have the deep compliance and expertise in risk control that can help tech companies launch new financial capabilities in the safest way possible.

The demand is there, to be sure, as the conversation came against the backdrop where PYMNTS data finds that more than 44% of FIs servicing large enterprises and nearly 43% of FIs serving cross-border payments customers say their customers are likely to adopt embedded finance solutions.

The greenfield opportunity will be especially attractive for the thousands of banks (including community banks) in the U.S. that are seeing deposits decrease.

“These banks are looking for ways to reinvent their institutions through the next 10 years,” he said, “and I think we will see more banks enter the [BaaS] space in a measured and calculated way.”

The Mechanics

In terms of the mechanics of that evolution, the company’s BaaS application programming interface (API) helps client firms launch new banking products and functionality in their products in a matter of weeks when the endeavor might otherwise take years.

“The API,” he said, “helps a company absorb new functionality into their software without building it. In the same way that Stripe has helped companies accept payments in a way that’s embedded into their products, companies like Unit are helping to do it in banking.”

By exposing an API for sending a check or depositing a check (in just one example), Unit enables companies to design their user interfaces to take advantage of those capabilities and make them available for thousands of businesses. Last year, he said, Unit processed more than 2 billion API calls.

“The API is the foundation for everything that we’re doing — and it’s the foundation for all innovation in financial services,” he said.

He offered up a case study in Invoice2Go, a Unit customer that delivers invoicing solutions to SMBs. That firm had initially based its model on collecting payments for invoices and sending those payments to business bank accounts held at traditional FIs.

“But once they realized there was so much ‘flow’ going through their platform,” he said, “they decided to expand into banking and bring that convenience of banking to hundreds of thousands of small businesses,” offering fee-free cash deposits and withdrawals at ATMs, and custom-designed physical and virtual debit cards. For the platform, the benefits accrue from growing transactional activity in previously more software-like areas.

Transforming B2B Payments

One area that’s ripe for digital transformation and embedded payments is B2B payments. An accounts receivable provider could make the leap from helping client firms manage their AR functions to offering factoring options. Damti noted that within commercial transactions, real estate is currently offering a real and growth avenue for BaaS, as client firms use the platform to create special purpose vehicles (SPVs), which hold property-based investments and bank accounts, where investor funds are collected, managed and distributed.

“Everyone who is touching a business right now,” he told PYMNTS, “as far as helping them manage their finances — whether you’re in the business of moving money or tracking money, you’re in a great position to offer financial services and expand them over time.”