October 20, 2022
Embedded Banking and Payments - The Idea Behind Figure Pay
Embedded finance, banking as a service, and payment solutions everywhere... We find ourselves at Figure Technologies in the eye of a transcendental hurricane. All of these phrases refer to the same idea, which is access to financial services via straightforward APIs, particularly but not solely for non-financial companies.
Want to give your customers a debit card? No problem! Want to offer them FDIC-insurance through a partner bank? Check! Want to create a closed-loop network that allows your customers to transact outside of the interchange? Done!
That's part of what Banking as a Service is about, but there are many further layers in this onion. While most people think of this as an exercise in implementing an API, true scaling and strong contribution margins can only be achieved by covering all the foundations. Let’s see what the onion layers look like when it comes to embedded banking - this time from the inside out.
At the heart of any embedded finance provider is the ledger. Every transaction is kept safely and securely on the core as the system of record. This is where the savings potential of a BaaS solution comes into play first, as you can pay for access on a "per drink" basis.
A traditional alternative would be to purchase a core system, face a potentially multi-year implementation, and spend millions before you process your first transaction. This is only a good alternative for well-capitalized banks with lots of time and resources. A less costly approach would be to purchase a license for a packaged system or a semi-custom solution. However, there’s BaaS, which enables fintech companies to cherry-pick the most suitable embedded finance solutions or features and leave out the elements that would only increase the operating costs unnecessarily.
At Figure Technologies, we built our original system on the Provenance blockchain, utilizing the ironclad processing infrastructure to create a perfect, immutable, and easy-to-scale ledger. To prove to the industry this was not vaporware, and learn through experience, we launched a direct-to-consumer product called Figure Pay. We showed the industry that we could build a standard banking technology on the blockchain.
The natural next step was to open the technology to potential B2B customers, allowing them to leverage this platform for their customers (aka B2B2C). This couldn’t have been realized if we hadn’t first started with the DTC product. The experience helped us understand the prerequisites and customer needs of a true BaaS API system. Testing and certification on this level would have been physically impossible without actually launching the first product ourselves, and this experience led to many realizations.
Today, elements of the platform run both on- and off-chain, depending on the use case, and complexities, like gas fees, are hidden from customers to make launch easier. As a result, customers only experience a robust, highly available banking ledger core.
21st-century embedded security
Operating a DTC product, particularly in fintech, provided the Figure team with many insights into the challenges of offering financial services to end users. First of all, challenger banks are all targets for a great deal of fraud, and the criminals are getting more and more sophisticated by the day.
Most BaaS vendors do NOT run their own card and banking programs and therefore have little understanding of the daily onslaught of malicious actors attempting to gain access to the platform. While developing our embedded banking solution, we felt that the average BaaS customer would not understand risk/fraud services until it was too late, and therefore we felt that offering this additional service would lead to more profitable, satisfied customers.
For these reasons, Figure's integrated banking solution places a high priority on satisfying all compliance and security standards set by banks and other financial institutions:
Know Your Customer
Bank Secrecy Act
Customer complaints and disputes
Anti Money Laundering
B2B and B2C customer experience
Fin Ops is an area comparable to an air traffic controller and includes areas such as settlement, reconciliation, and second-level support. Again, by running a DTC product, Figure Technologies was able to streamline these processes, offer them to customers, and provide either permanent support or a bridge for some time while the customer gets comfortable with their payments business.
Most people think of customer service when they hear the word "operations," and it is an important component. By running a shared workforce pool, Figure can cost-effectively leverage the team supporting our own DTC customers, or simply provide customers with a hosted inbound CRM system to empower their own CS and operating activities. In our vision, the key is experience combined with flexibility and cost efficiency.
Our company offers its products through Figure Payments Corporation, a FinCen-registered money transmitter. Figure Payment Corporations interfaces with all government entities, including regular audits, and does so without the need for the involvement of our customers. We feel owning this legal entity, providing both technology and operations make Figure stand out in terms of a single point of responsibility for our customers.
Cards and Program Management
We jokingly remark that despite being one of the largest in the world, the card business is not well documented. The industry is opaque to outsiders, and the only way to comprehend the entire process and all market actors is to sell a product, therefore there is some truth to this. The multiplicity of actors, each with their own opinions on the sector, is what causes the opacity.
Network operators understand their own domain but have little field knowledge. While banks primarily police compliance, processors approach the sector from a fee perspective and can hide information. Yet, the big picture is missing in action, as information is asymmetrical across the various parties.
Figure recognized that there was no real program manager acting as an advocate for the customer, walking them through the process of starting an operation, and living with the software environment once it was up and running.
It is this unique operating model of providing banking and payment APIs, card program management, leveraging our legal entities, and providing operations support that makes Figure stand out in this space. If you are interested in knowing more about our banking as a service solution, book a free consultation with our customer success team through the Figure Pay website.