Your one-stop shop for embedded finance

Main topics:

[00:02:12] Banking as a Service (BaaS) vs Embedded Finance

[00:07:43] White Labeling vs Embedded Finance

[00:15:55] BaaS landscape and main players

[00:22:42] HUBUC and BaaS 2.0.

[00:40:55] The competitive environment for BaaS 2.0.

[00:49:08] Recommendations: book, recent article, company, influencer, brand


Hasan: [00:00:00] We combined compliance with technology, and then the magic happened.

Welcome to Structural Shifts by Aperture, a bi-weekly show that radically re-imagines the future of work, society and business. We take a devil's advocate approach to exploring the massive shifts transforming our economies and our world. Our guests are not afraid to challenge the status quo! To learn more about Aperture, visit www.aperture.co.

Our guest today says that embedded finance represents a market opportunity projected to be worth $7 trillion by the year 2030, which no doubt helps them raise a very healthy seed round through Y Combinator recently. Your host, Ben Robinson, is speaking with Hasan Nawaz today. He is co-founder and CEO at HUBUC. This is a banking as a service platform that enables brands to open new revenue lines by seamlessly embedding financial products into their customer journeys. HUBUC takes care of all the regulatory requirements and manages compliance risk. This allows their customers to get their services to market in less time with fewer resources.

In this episode, you are going to learn what banking as a service or BaaS actually is, and it's not the same as embedded finance. What's happening right now in the BaaS landscape, the difference between BaaS 1.0 and 2.0, and more.

Before we get to the show, let me just say: happy birthday to the Aperture team. Our marketing and strategy consultancy is two years old. In case you are brand new to us, we design build, fund, and scale digital age companies. Now on with the episode.

Ben: [00:01:36] Hasan, welcome to the Structural Shifts podcast. We are delighted to have you on.  I think we're catching you early in your trajectory. You’re clearly on this massive growth journey; and even though HUBUC might not yet be a household name, I don't think it's a question of if, it's a question of when. We're so excited to have you on. We're going to talk all about the next generation of banking as a service.

Hasan: [00:02:03] Thank you. Excited to be here. It's amazing. I have read through some of your older articles when we were starting, and it's a pleasure to be here.

Banking as a Service (BaaS) vs Embedded Finance

Ben: A good jumping off point might be to define what we mean by banking as a service. Hasan, what's your definition of BaaS?

Hasan: Banking as a service, I think there is a trend right now going on that everybody seems to be doing banking as a service. It's mixed up now. Everybody has a different definition. My personal point of view on banking as services, if you use the word ‘bank’, you should be at least a chartered bank. You can't be an electronic money institution saying that you're a bank.

My definition is there's banking as a service version 1, which has existed for the last four or five years; then there's the next generation. For me, banking as a service provider right now is normally a regulated entity who has some together on KYC, AML, and the different set of tools from different service providers, slap an API on top of it, and they go out to the market and say this is banking as a service – which worked great for the last four years.

Ben: In terms of definitions, a lot of people use the term ‘banking as a service’ interchangeably with embedded finance. How do you differentiate between those two terms?

Hasan: From our point of view, it's a clear distinction between two different go-to-markets, two different type of customer bases, and stacks. It’s a completely different thing.

Let’s make an analogy. For example, before Amazon cloud or Google cloud or Azure cloud, there used to be these data center service providers, like they were monolithic systems where you have like a single service provider and they have a couple of data centers and they're building some layer of software on top. There's the previous generation or banking as a service provider, which is the Version 1 let’s say, and then there's an embedded finance.

The Version 1 service providers, it worked great, similar to analogy of data center service providers before the cloud happened. The difference is it works great in your specific use case. It helped a lot of startups to become FinTech, and N26 were built on top of Wirecard and GPS and everybody else. That was great. But embedded finance is talking about embedding these FinTech features and these financial services into your existing products. We are talking about a whole different customer base, if I were to say, especially in the B2B space. It is like having a sleeping majority of people where you have to first educate and also they need to understand what is the value for them – mostly it's about know monetization and retention for them. If you're looking at how they access or they want to access the financial services, they're not looking for signing several different contracts and waiting for a year and setting up a compliance thing. Their business might be freight forwarding, accounting, retail, vendor payout – there's all those B2B stack companies on the business operating system.

Kind of provide services for these service providers. That’s where I think embedded banking service partners need to come in, like us for example. We target that customer base and help them understand what this can provide, but it's like a white glove managed service, to be honest. You have to make a single layer, which takes care of compliance and all these different hard tanks, which is settlements and KYC, AML, regulation, and all that stuff.

You need to make sure that the customer is not affected with it, in a way that they want the feature, but they don't want the hard things about it. How you can build that layer on top, is I think it.

Ben: Essentially the difference between BaaS and embedded finance is really looking from the vantage point of whether you're on the supply side, whether you're a license holder; or whether you're on the demand side, with your brand that's looking to offer financial services through your existing distribution channels or together with your existing offering. Is that the way to think about it? You are the orchestration layer that sits between the supply and the demand side – you make it possible for existing financial services providers to open up new distribution channels and you make it possible for non-financial services to offer financial services solutions for the first time?

Hasan: It’s not about providing APIs. It’s more about managed versus non-managed. Just to give you an analogy, there are quite a few in history, but for example, before Shopify or Stripe, banks were giving acquiring channels online, so you could take payments. People were setting up e-commerce stores. I was a software developer, I set up a lot of e-commerce for companies.

The difference is now anybody can do it right. That anybody can do it comes with an enabling through a different take on the risk compliance and making sure that anybody can access that. That's where you can seamlessly embed in your value proposition those features. If you cannot do that, if you're going to have set up compliance calls and have to set up a whole department of looking at AML policies and drafting them, then you're probably not there yet for that. No code embedded happening.

White Labeling vs Embedded Finance

Ben: [00:07:43] If we go back to the early 2000s, there was lots of white labeling that was happening. A lot of supermarkets started to offer insurance products, they started to offer banking products. The difference here is the extent to which this is truly seamless, and the speed with which you can change providers, the speed in which you can onboard. How would you draw the distinction between white labeling and embedded finance?

Hasan: If you see a little bit, even further down back, it seems like now everybody's doing banking as a service with cards and accounts, which was basically co-branded card programs from the past. Every bank had one, every supply chain had a co-branded card. There are still active ones with big ones, but most of them failed, because there was no real customer pain being sold for the end user but just giving them more and more cards. I think that is very true.

That co-branding worked for some companies, bigger ones. Let's say, for example, in Spain, there is Zara and these guys who have distribution power and they really enable their customer to use something and in return they are getting rewards and stuff. But that only works for a certain limit. How many more cards do you want?

If you look at now, what is happening, I think it's not about how easy the access is, it's deeper stack level features. For example, it's not about only issuing a debit card or a prepaid card, it's about, can you enable customers of yours to have access to real IBAN and mapped bank accounts guaranteed by a local banking partner, and they can pay taxes, salaries, receive money, send money, just like a high street bank.

In a nutshell, I think it's about feature parity with a high street bank. It provided for a new generation like a FinTech or a non-FinTech player to be able to use those features, because normally they cannot get those. It's about changing the scenario of how banks used to be. They are the best people to do compliance and they've saved that for hundreds of years.  There's no question about it. But I think the scenario has changed in a way that now you cannot go full stack into the market, to the end user, and be also covering the wholesale side of things.

Now there's an opportunity, I think. In this case, we work with smaller banking partners. For smaller entities who have a smaller liquidity base and user base, I think it makes sense to become the store of value and the store of compliance and safeguarding. That's the core which they are really experts on; and leave the distribution to providers who can really make better customer experience by embedding them into different ones.

As a regulated entity, you get the deposit, and your value where you store eventually. All the features which you are distributing through your own channels now are being used through an API, and have 10 X or 100 X more reach to customer Bases because you're getting an aggregated access to those customer Bases/

For example, one of our customers, Wage Stream, they do early salaries. They launched in Spain, and they're like, “Look, we're going to need 300,000 accounts.” Now, our banking partner had I think one fourth of those. For them, it was like, “Wait, what?” I think smaller entities; it's really helped with opening a revenue stream. Indirectly, you don't have to put your marketing, and also the regulator is happy because you're holding more balance and you can use it for other accesses.

That is where we see both sides getting some interest. It's not about only giving prepaid cards.

Ben: [00:11:43] It is sort of driving more of a distinction between manufacturing on the one side and distribution on the other. The reason it seems that people are so excited is because you are now distributing banking through a channel that has higher engagement, lower cost of customer acquisition, the potential for high lifetime value, because it's easier to cross it onto an app because you understand the customer context. Is that the reason why people are just over themselves with excitement about embedded finance? Because it's about growing the addressable market and making banking much more contextual?

Hasan: Yes and no. It's not about only the user experience. You want to give the best features to the user, but in return what are you getting? There's a saying: if something is free, you are the product. If you have providing the customer something, what is the benefit for the person who is providing it? Why people get excited about us or venture capitalists or investors, or in general? Every company is going to be a FinTech company, let's say.

I think every company at some point touches the payment stack. The value prop or the USP for the company or the provider, is that I get to see and improve my retention of my customers, or I'm looking for monetization and I've happened to land in products and increase my unit economics by user APR by adding an intro deck provider, get affiliates to be on top of itself. If you have a distribution channel, you can add on top features by working with an embedded provider and get on top of monetizing your user base.

Then people like N26, an amazing company, they were the first ones to start overdraft, and then they started noncash to cash conversion from stores in Germany. Now, last time I checked, they were embedding. Grab also does it. They embed Chubb, for example, their insurance company product. They embed seamlessly. Instead of going and filling out forms for insurance while you're covering for three days, just hit a button and it automatically books.

Yes, the user experience is great, but also the providers getting something out of it. It's not about just contextual user experience. It's about what are you getting out of it as a provider? Then of course the service provider in the background always get some revenue. I think it's both sides of the table: the customer and the user and the provider.

Ben: What you just said there about N26 is interesting because we tend to think about embedded finance as being embedding finance into non-financial channels. But it can also be embedding into existing financial channels. The difference is you don't have to build everything yourself.

Hasan: Exactly.  You're not going to start doing underwriting for an insurance company. They do better. You want to work with one of them. They understand probably more risk profiles than a FinTech can, because of their wider data set across multiple services and the history of underwriting all those risks.

You end up working with one, the question is: which is the better one? Do you want to go and spend seven to eight months integrating with one, or you just want to come to a platform which provides different sets of services and pick one and use it?

That is what happened with, for example, you see Amazon web services or Google cloud as well. They started with service for internally; they were built for internal use of Amazon itself. Then they started on top of features. Now, eventually, you just join AWS for the hosting service and end up using Elasticsearch and AI models. There's a ton of services. You think about, I don't need to build it. I don't need to reinvent the wheel, it's already there. Use it as a service, and the cost is pretty similar of integrating versus managing it.

That's why people started using a cloud provider instead of having your own data centers. I think there's an opportunity over there.

BaaS landscape and main players

Ben: [00:15:55] Hasan, let’s talk bit about the landscape for BaaS. A lot of people think that all BaaS providers are essentially the same. ostensibly it looks like it's just the question of APIs and linking with brands on the demand side and banks on the supply side. Everybody gets lumped into the same bracket. But it's much more nuanced and layered than people think. Help us out here. Help us, if you can, to provide a schematic of who does what and what the differences are between the different BaaS players?

Hasan: Let’s start with somebody like Solarisbank; they are a fully chartered bank and they have the right to say they are a bank, because they have a charter. Then they have brought in a couple of service providers for KYC, AML, some processor, a lot of different things. Although everybody talks in terms of partners, but we all know the partners behind. Eventually they've got a license and some partners, and then stitch it up together and then have a API on the hub.

The value proposition for the customer is good because it gives them security of a full bank license, and they can passport hopefully in other European countries. The lending part, if you think about how they make more money, it’s not only on account basis. It's more about how – and this came out of our report- I think that there's a lot of revenue for them. That is also value proposition for the customer, because it's not only cards and accounts, they have a German IBAN. It’s a very good proposition for the local market in Germany, especially.

Then you have the likes of Modeler, Railsbank, Swan, or older players like Treezor from France; they have powered a lot of good startups who became FinTechs. Everybody knows about them. Then there's there was Wirecard, the original. What happened over there is bad, but what they built initially was an amazing scalability of the product. They powered the likes of Curve. They have innovative companies who build on top of the N26. Number 26, the original name, came out of Wildcard AG. I was one of the first customers; we had a card transplant and the name of the bank.

That is great. That is regulated on a lower level than a bank charter, but doing similar things – no lending, nothing like that. “Here's an account and a wallet,” most of the time. If you want to go fast, let's do a prepaid card instead of a debit card. How your KYC requirement for a debit card versus lower against the prepaid card, that's where Revolut started. It didn't say debit on the card, it just was a card for a map class. That is like having any prepaid card attached to a wallet.

Then you have, in the US if you look at Synapse. They are running on top of a banking partner, one partner. They integrated with them and they're running on top of it. Similar to Synapse, but not having the regulatory and compliance obligations of running the whole stack by themselves.

This is where you see different service providers, but their offerings change as well because they're mostly in their countries, wherever they are. Synapse in the US or where the partner band has access. On the Baffin, SolarisBank is in German bank eventually. it is a FinTech, but it's also a bank. You have the likes of Railsbank, and Swan, and Treezor, and everybody else. Then in the US you have unit and bond and all those players doing different things.

This is all what I think as monolithic. Everybody does one of everything: one of service providers, one of KYC, one AML, one processor, one of everything.

Ben: It is kind of monolithic. It can be vertically integrated, like something like Solaris or Marcus, for example; or it can be modular, as you said, Synapse and so on. But it tends to be narrow in the sense that it's a single geography or a single vertical of banking. Is that right?

Hasan: Yes. That is how it works. Somebody was powering the fintechs of neo-banks, and somebody was starting to focus on expense management software, a little bit on corporate because corporate had a higher interchange fee versus consumer, especially in Europe, they're not super regulated. There are tons of different things inside, but eventually, if you think from a technology or software paradigm, it’s monolithic. Versus the new way, which is going to come, is how do you have a service-oriented architecture? It's microservice architecture, for example.

In software terms, monolithic is one single system with one database, one service provider, one of everything. In microservices, it looks like chaos from the outside because you have tons of different services interchanging, but then you have a central message bus or a service process orchestrator, which we think HUBUC is. That’s where we focus, is where you have tons of different service providers. Why it's happening – I'll come to that in a minute –there's tons of KYC providers. There are seven or eight different KYC providers, and we can easily name them. Then there's different AML providers, anti-money laundering software providers. Then there are manufacturers, big ones, small ones. There's a few of them, like five or six, ten, definitely.

Then there is the awakening of these old school entities like Treezor, who were doing that co-branding stuff from the past. Now suddenly they’re also calling themselves banking as a service. But they have accounts which are mapped to a proper bank and stuff.

What we see is that there's this fragmentation in the service supply side. If you look at the theory of marketplaces, a really good moment is when you have fragmentation on the supply side, when you want to build a marketplace on top of it. Your customer is isolated from so much different information; seven or eight different contracts, to build a small use case, you can just provide it as a marketplace, one contract, one compliant, and one commercial relationship, and then they don't have to do anything directly.

That is how we see the old school versus the new generation.

HUBUC and BaaS 2.0.

Ben: [00:22:42] That's great, we can dig into that. I think that's a nice segue to talk about HUBUC. Let's maybe just zoom out for a second and you can tell us how HUBUC started. I think that's relevant, talking about how you're different and BaaS 2.0. Let's start there. How did you start HUBUC? Where did the idea come from?

Hasan: This is our fourth FinTech product, or let's call it fourth FinTech pivot. We started on the other side of the table; we were the consumers. We started with an initial idea in 2018, me and my co-founder. Of building a high-frequency trading board for the crypto market. It’s like we're quants build software for the crypto. Didn’t work out, what a crazy idea!

We pivoted towards launching a neo-bank for crypto. That is 2018. None of the European partners wanted to work with us. Went outside Europe to a country called Bahrain, it's a crypto friendly regulator. They did come a compliance sandbox; it's a copy of their FCA regulation sandbox. Got in, there was no infrastructure, came back to Spain. Said: let's build a QR payments app because we believe offline businesses have also the right to understand their customers, and nobody's built a Google analytics for offline businesses. In order to do that, what you want is a closed loop payment system like Alipay, and WeChat have done it in APAC. Those guys went from nothing to basically directly 4G, or 5G.

We tried to do that. We build it using a QR code library. It was a two-sided marketplace, and merchants could understand who's coming, what their agenda is, what are their profiles, retention rates and everything, and then he could do segment. On the consumer side, we thought that that was great, to get a deal when you want. But there was not really a lot of pain, in Europe at least. Either we were early or too contrary.

QR versus MasterCard and Visa in 2018, it didn't work out. People want to pay with cards and iWatch and iPhones and all of that. Changing market habits is very expensive. It failed. We pivoted again, let's build something which really the market needs.

We started working on a corporate expense card. We build it on top of a banking as a service provider, from UK, Ireland. It’s a great company, but we found out that there's a lot of work to be done, especially from a customer point of view, when you are a B2B corporate expense card, where your customers are asking questions about: where's my money going to be safeguarded, where is your bank? Then you say, “It's in UK. But they have a license in Estonia or Latonia,” and your customer is like, “Why do I have to change all of this just for a card.” They want feature parity.

If they are switching from the old, let's say high street bank, towards you to get a better experience, they also want the same features. It's not about giving wallets to kids and cards for neo-banks for kids, it's about providing service to people like Volkswagen and these bigger, huge corporates who are going to have corporate expense. You want to enable them to do that. The CFO of the company is going to ask you: where's my money going to be safeguarded. That's the responsibility. Who is responsible? What is the guarantee? Why is your license in Baltics, why not here? Why are you not working with a local banking partner? It doesn't work. It doesn't fly.

It’s good to build an MVP with banking as service providers, but as soon as you raise money, like seed round or something, you're going to graduate from them. I've seen it happen. We see Revoluts graduating from them, everybody graduates eventually because the core business of finances service.

We launched Pigari. It was a great product. Corporate expense in Spain, similar to Soldo or Conto for Spandex for Spain and Mexico. The Spanish speaking market, in March COVID hit, we just launched it the first week, end of March there was COVID lockdown. There's not corporate expense to be managed. We tried find a distribution strategy for our product, ended up finding out that there's other companies who want the product but under their own brand, but they don't want the compliance hassle and everything else, which we went through; to understand and build ledgers and sub-ledgers and how these spending controls and how the CFO can give a virtual card for IT team versus a physical card for a sales guy on the road who just needs to spend in petrol pumps and parking and food and the card shouldn’t work at the end of the day and the weekend the cards should be blocked.

All of this, which is what a CFO wants, the people who have been doing corporate expense software, they understand. But they don't understand how to make this happen on a FinTech product or with a banking partner. They will probably need expert financial service developers who have built mail banks before to consult, and then it never happens. That's where we came in.

They reached out to us and said, “We love what you build. Can you give us under our brand?” That's where we pivoted. We had our first NOYC. This time we were not going to pivot towards the intersection there, but we actually saw signs of real traction. That was May 2020. We are a very young company, if you think about it. It’s like not even a year old. We launched with that one customer on demand and then we built a platform. We looked at all of the market. We looked at how many different FIS and Marquette and GPS and Paymentology – there were all these different service providers who were processing. Then you have KYC providers and AML providers and manufacturers. All of this, and now with PSD 2, you will probably need an FX rate provider, because it's mandated. It goes on, it goes like way beyond on.

I think I did twenty-four or something interviews with different companies I looked at, when we were looking at how we were going to work with each partner. The opportunity was, what if you aggregate them? There is a higher set of costs for us to work against their APIs and have three card manufacturers instead of one. But for our customer, it lowers the cost 30%, than it was before with one card manufacturer. They have a wider feature set. You can ask us gold-plated cards all the way to organic cards; all the way to dynamic SIB cards, which are for online fraud. It changes the three-digit code of the CVV PIN every five minutes.

We have this wider set because we were able to aggregate it for the insolvent. The mode eventually ended up being, yes, there's a lot of demand, but that demand needs a white glove service and a managed service. Somebody's not going to knock on your door to get your API. You’re probably going to go and have a chat with them, have a scope of work session, have a flow of funds meeting to understand what they want to build and if it's the right thing to build from a regulatory and compliance and everything point of view, and then prescribed them a solution. Then you make sure that your banking partners and everybody else on the other side of the market side is also happy with the risks you are taking. Have you built a mode on manual compliance versus digitalize it in real time? Are you doing sections and transaction monitoring as you should be? Are your partners happy? Are you embedding?

We work with three banking partners right now, and we made sure that we digitalize all of their rules and requirements which they had for us, for our customers, into one policy. That is very hard to do. Our head of compliance, she comes with 30 years of experience, but still it's an exercise that’s not been done before. You are trying to take three different compliance policies and pull them into one single and making it simpler for the end customer and us, and making sure that it's in real time and implemented on the technology stack. It's not about checking in PDFs and putting out PDFs on rules and regulation, it's about really implementing and enforcing those rules on the platform.

Yeah, that's where we come from and that's how we think about the product.

Ben: [00:31:29] If I may try to summarize, the insight came from the fact that you were on the demand side. You understood the pain that sometimes brands go through when they want to embed financial services. Then the other insight was around that fragmentation of the BaaS space. There was room for somebody to do the aggregation. But it sounds like more than that as well. Maybe that's just the other things you talked about, just a function of reducing the friction for the brand. You've talked about being able to operate across geographies, about being able to do some level of compliance. Help us out, if we were to create a list of criteria for BaaS 2.0, what would be in there? Sounds like multiple geographies, aggregation, compliance. What else would you put in that list?

Hasan: Similar to what Amazon had, their three core values. Everybody wants a cheaper product, fastest delivery, and everybody wants the widest feature set.

For us, if you follow it, it's very simpler. But just add on top of it, which is, we want the customer to have a managed service and cheaper than probably another place. They’re not going to come in for the core feature, they are looking for monetization and revenue, so how can you enable them? You're giving them wholesale rates, you get them better prices.

Secondly, they want the widest feature set. Okay, I can do cards; can I do accounts, can I pay salaries, can I pay taxes on these accounts? Okay, great, how many countries do you have with these accounts? Okay, you have three different islands, what are you looking for next? Okay, we have seven different countries. Can I go from Europe to US? Because naturally, European startups and companies when they grow up, the natural way is looking at the US market. There are very few who go to other countries, mostly it's US. Can you build a bridge between both markets? Yes. Okay, what is the capability and feature parity of your service versus a high street bank versus the global scalability of your platform?

Can you do everything that you just said in Spain, Germany, UK, Netherlands? Can you also do this in the US? In US, it's a whole different way of looking at it. There's ACH and things, people are still taking paper cheques. There are service providers for cheques. What is the feature set over there? So, the widest feature set, a good price, speed to market is important because people want to launch in 8 to 12 weeks, maximum. They are not waiting for months.

Then it's about the most important one: compliance. That is included. Your banking partners are looking for it, your customers are looking for it. Customers are looking not to do anything, because they don't understand it, they are waiting for you to guide them, like managed service. “Don't worry, you don't have to become an agent. We will take care of your compliance. We'll take care of onboardings. You just have to follow these different guidelines and you have to do this, this, this.”

Always, as a program manager as well, you are thinking about different programs. If you're talking about Cardwell's, that everything is being followed. Basically, you are taking risks and passing it through to the end customer. This is normally what happened before. With all due respect to our colleagues in the market, there were registering agents and distributors passing along the risk saying, “I'm not the only one doing it. Here’s this guy who's actually a reseller and he's also doing it.” When the regulator comes, they can also point to you saying, “He didn't follow. We told them to follow these guidelines.”

Now you're saying that HUBUC is taking the risk for you. It's not only dilated risk, it's about floats. Can you manage float settlements? How do you manage liquidity when you pass through three or four or five days of Visa float, or versus MasterCard asking you three days sometimes, depending on the use case? Is your customer going to put in like days of transaction volume float for you? No, HUBUC is going to take care of it.

The current customer, you're looking for that.

The regulator is looking for: are those perhaps sanctions? What is happening to these transactions coming in, going out into ledgers? Are you monitoring them? Fintechs, all of these different things, SCA regulation now coming in – are you following? They want to see from a regulatory point of view. I think when we worked with the Central Bank of Berlin, we learned something, which was working with the regulator is very different from providing service to the market. But good regulators understand and they adapt, but they also want to build trust with you. Trust is a very key factor. To build trust is very hard. You really have to work for it. But you can lose it in a second, like Wildcard did.

Ben: [00:36:21] Yup. It's interesting, if we continue with the Amazon analogy, you've talked about how the customer wants cheaper, they want faster, they want richer feature set. Amazon is also working with a whole bunch of other suppliers in its marketplace and they want fulfillment, and they want certain things as well. It seems to me that you're doing both, and regulation or compliance is a critical interface between both because the customer doesn't want to have to worry about it. At the same time, the banking partner wants certain levels of assurance as well. My sense is that, if we talk about BaaS 1.0, I think there was this almost lazy assumption that if I can provide the APIs and the interface between banks and brands, then I'll always be able to attract banking partners and other BaaS services providers. But I guess it's going to be more competition on both sites; more competition for demand, more competition for supply. Do you think that it is compliance that's going to make the difference in terms of winning both sides of the marketplace?

Hasan: Yes. How do you make comfortable your banking partner or the regulator? It comes down to compliance. Can you make a mode out of it?

At HUBUC, the biggest team is product team, the software development team. The second biggest, and the most important one at the core of the heart of the company, is compliance. If you combine compliance with technology, that is where you can build interesting stuff. But you have to know what you're doing, and it has to be scalable, and it has to go across all of your customer base.

Ben: That's clear. I feel I'm getting this real picture of what's different about BaaS 1.0 and BaaS 2.0. When you were talking about BaaS 1.0, it was almost like the tech didn't really matter, because everybody has great API, everybody can provide a sandbox. Almost like there wasn't that much differentiation in the tech; versus what you've got, which is a new tech stack. You've got aggregation and you've got compliance. There's the basis or the kernel of something which is differentiated and defensible.

Hasan: That is very true. We are not only also providing the compliance layer or that as at the heart of the company. With regards to tech, just to give you an idea, when we think about tech (I'm a software developer with 12 plus years of experience), we have unit tests. It's a test with automated tests, which fail if there's any part of the platform which does not respond over 100 milliseconds. The SLA is 100 milliseconds. At 100 milliseconds, you feel everything instantly. So that is where we think about scalability from a product and technology point of view. You can build all the compliance and everything, but if your tech stack, for example, is slower, the person building on top of you is also getting that. It's aggregates.

Ben: The compounds, right? Across the latency compounds.

Hasan: Exactly. We are not only trust-building compliance from a technology point of view, we have to be scalable as a platform, which you can power any number of Revoluts on top of you. The transaction volume, all of them aggregated generate.

We are also in a system of authorization. Just to give you an idea, we are the system of ledger as well and authorization. What it means is, our cards, when somebody touches one of our customers at the point of sale or online payment, is going to come through the scheme rails all the way to us. We have two seconds (normally SLA from the scheme is two seconds) to respond to it, implement business logic on top of it. So, if it's a corporate expense card, somebody put some spending rules on top of it, that all needs to happen before two seconds. We have to check, that card might be having three different ledgers and three different banking partners for us.

All this orchestration, that is where we come in. I do not want to say that we only care about compliance. We are a product and a compliance company. We combine compliance with technology, and then magic happens. It's not about just sales – which is great, we have a lot of customers – but this is where you build the mode. You build trust with your regulators and partners. You build trust with your customers by providing a great SLA on services. Then you can also scale out, that is where you build trust with your investors, because you're not actually having larger churns, your contracts are longer term, you're betting on the next 5 to 10 years of the market.

The competitive environment for BaaS 2.0.

Ben: [00:40:55] You just raised a very healthy seed round through Y Combinator. As I understand, it was very heavily oversubscribed. It seems to me that smart investors get what you're doing. They understand how you're evolving into the next generation of BaaS.

My question is: what does a competitive environment look like for BaaS 2.0? Is it people like Stripe treasury? Is it potentially people coming in from different spaces, people that already manage many-to-many orchestration? I would think people like open banking platforms that already provide the routes from customers into many banking providers or potentially even some of the more advanced SAS providers that again provide many to many interactions.

When you look out, where do you see the competition coming from? Is it BaaS 1.0 competitors and step up, or is it a new generation of competitors that maybe coming from adjacent spaces?

Hasan: I think first priority is a validation of our these of one part, which is, instead of competing against the bank, we need to work with them and aggregate them. They're aggregating or they're at least staying on the website, their YC Lam is a great company, an amazing company. They've changed the internet e-commerce world. But they are talking about aggregating four big banks. We say, “That is great, somebody needs to aggregate the rest of the smaller banks.” But we are both agreeing that it's time to build a platform which is scalable, trustworthy, and that customers don't have to go through hoops of how to use it. It's a management way of doing.

But then their outlook, coming from their businesses, is that: here's the form, fill up the form. There is no touch point. It's all automated, digitalized, and you're going to get an API and you're going to build it. That's where we differ. That's where we are completely opposite. Our approach is: we come, we look at the use case, or we have a chat with you, we understand the flow of funds. It's a very enterprise point of view. Here we are very similar to Adrian, for example, who has 400 merchants and makes more revenue than Stripe with hundreds and thousands of merchants. It's completely different go-to-market strategies.

With regards to Banking 1.0 competitions, here's the thing: when I was like actively developing (I still sometimes do, but from a solutions architect or software architect point of view), if you have built a monolithic system, you're looking at the rewrite. If you're happy to do that, you'll be doing that to rewrite it into a service-oriented architecture or microservice architecture. If you want to do that, that means recordings, reissuing, a lot of which people don't know.

Ben: In short, it's going to be hard to go from BaaS 1.0 to BaaS 2.0. But what about the people entering from adjacent spaces? People that are already not monolithic, already have pretty powerful extraction platforms?

Hasan: It's not like there is no competition. Stripe Treasury just raised 600 million or something and are opening in Europe. They started issuing Euro. But then they are giving you cards, and their go-to-market is their Stripe connect user who is already using the Stripe connect function of taking payments for their marketplace and they're only doing the merchant payouts with a slapping on top of a card that is a corporate expense card. Then if you have an account, you can hold it for a longer term, and that's it. That is banking as a service, or Stripe Treasury is focused on their marketplaces business.

We, on the other hand, look at talking about petroleum companies and mobility companies and expense management companies and taxes or vendor payouts. We have customers who are doing B2B payments. It is a very different approach towards what their market is versus what should ours. The market is super huge, and we can talk how we think about marketing, and then there is the markets and there's players Vodeno and Ion Bank, and Phoenix, for example, in the US, Modern Treasury. They have different players in different go-to markets, but it's very hard, I still think, to understand coming from acquiring, which is easier, almost commoditized, where aggregators of aggregators and pay facts of pay facts. Aggregating pay facts, like prime ratio; versus payment method. It's completely different. The KYCs and merchant onboardings for opening accounts for KYB is very, very hard and expensive than onboarding end consumer, which is easy. Anybody can do it. On Fiddle, take a picture, loudness check, there you go. Pass it through compliance Wantage, perhaps in sanctions, that’s it.

Now, onboarding a company, it is a corporate with complicated subsidiaries everywhere else. How do you go along that? That is where you come in. Are you taking emails of zip files of compliance KYBs, or are you actually having an API end point which actually digitalizes, at least giving it a try on first digitalizing a KYB fully completed digitalize, and going through the API, versus sending zip files over emails.

There are very diff different ways of looking at it, but there is definitely competition. But the market is huge as well. To give you a flavor on how we think about the market, there's the trillions and all of that stuff. We have a very simple thing, coming from YC, you learn something, which is you need to go bottoms up. It doesn't matter the market size, because that increases. We have seen examples of Coinbase and Stripe YC alumni, we have a Brexit YC alumni, Grump YC alumni, the list goes on. These are the big ones. Then you have Airbnb and everybody else.

Somebody started with air, bed-and-breakfast on air bed, literally air bed, and then it became Airbnb.

What we think about is, the market size is bottoms up we take, it's very hard to do it because there is so many different features you can add to build a bigger market or a smaller market. We think a base point, good example is the go to the ECB, European Central Bank, and look at the non-cash transactions. If you look at non-cash transactions across the countries where we can operate, for example US, Europe, APAC – almost all of it, 58 countries we can open accounts we can issue in 22 countries MasterCard and Visa. You work with both streams. But if we take across these countries bottoms up approach, take number of non-cash transactions (any transaction which is not cash), that is around 800 billion transactions last year. It's growing 7-8%, depending on the region. APAC is doubling almost, but Europe is still growing slowly, but not bad. Then there’s the US as well.

If you take this market size and you say: do you charge per transaction? Yes. Hypothetically, if you're charging 20 cents, divide the total number of non-cash transactions by the total number of cents per transaction, that is around 150 billion of bottoms up market size for non-cash transactions.

Ben: Give us a flavor of how fast you’re already growing.

Hasan: We joined YC in the stammer with $54,000 of annual recurring revenue. We did demo day in March with a $750,000 of revenue. We are currently at $890,000 revenue, and we have total booking across 11 customers of $3.6 million.

Recommendations: book, recent article, company, influencer, brand

Ben: [00:49:08] Really substantiates what I said at the start, which is you guys are really on a tear. I think those people who haven't heard of you now will be hearing about you pretty soon. Hasan, this has been a wonderful discussion. I think everybody would have learned a lot and everybody will now have a clear sense of what is Banking 2.0.

Just before we wrap up, I wanted to talk about recommendations. So every podcast we finish with asking our guests for sets of recommendations. If you're game, I'm going to ask you for five recommendations, the first of which is a favorite book.

Hasan: I have multiple of those.

Ben: I’m sure. You're a very learned man. Just give us one, if you don’t mind.

Hasan: I’m just a student of trying to understand things. A very good book is, The Innovation Stack, Jim McKelvey. He’s the co-founder of Square. It talks about how to build innovation and compete with companies who have never been competed. I think Amazon and at Squarespace, and then left at quarterly. And I think it's the only company they left the space so far. That is a very good world to understand.

Ben: [00:50:22] Is Square a company that you particularly admire?

Hasan: Uh, yes. I really like how they think about things.

Ben: I think really understand how you build grossly upon grossly.

Hasan: Yes. I think the key over there is they take risks, but they take them in a way that they first understand the secrets behind it. For example, if I was to talk about card issuing and if I don't know what is a APW profile to register the card with MasterCard, which is a basic thing if you do with card recommendations (CNS profiles and stuff), then you don't really understand what you're doing. If you don't really understand what you're doing, first you need to understand it and then you can innovate on top of it. They have done it multiple times.

In the book they also talk about the banks were not willing to go outside those city walls and give machines to somebody like a merchant in the marketplace, and they needed it. There are two options there: either you can be horribly wrong, or you can be very good and very right. Most of the time if you take risks and you understand the market, you might be right. They have been right multiple times so far.

Ben: Good. First recommendation, Innovation Stack by Jim McKelvey. Next one, a favorite recent article.

Hasan: It’s called The New Mode in Financial Services by Mr. Ben Robinson from Aperture. It is a very, very good read if you give it a couple of times. You have to read it a couple of times – at least in my case, I'm probably slower. I read it a couple of times and I still have it. I think it's a great piece.

Ben: Well, that's extremely kind. I want to tell you, I don't know how many podcasts we've done, but it's lots and nobody's ever recommended an Aperture article before. Thank you very much, indeed. That's very kind. The next one is a favorite influencer. Somebody who's essays, thinking you regularly turn to for inspiration or to learn.

Hasan: There are multiples of them, but there's somebody very interesting. They are not invested, by the way, it’s Ben Horowitz. He has a particular way of using rap to explain things directly. He also has a great book. If I was to give an option number two for a book read or listen to, Hard Things About the Hard Things from them. It's an amazing read, especially for CEOs and founders. You feel like you're not alone, which most of the time happens.

I think that is a very distinctive way of looking at business and entrepreneurship, and he uses those rap lyrics. Which is, if you think about it, they are amazing because in two lines they convey you a message which most of the time I would, or some good entrepreneur would spend three, four days of writing a letter to explain the same thing which they’d just explain in two to three lines. I think he's amazing to read.

Ben: To paraphrase Ben Horowitz, would you describe yourself as a wartime or peacetime CEO?

Hasan: Uh, wartime.

Ben: That’s good, I think you need to be. I think the growth rates you were talking about, they're not peacetime growth rates.

Hasan: It's 39% month over month!

Ben: Yeah. The next one is, a favorite brand.

Hasan: That is hard. SpaceX. Second would be Tesla; I don't own one and I'm not invested in any way, but it's like somebody who came in and really disrupted something, which is not building an app for something of something.

Ben: It's funny you say SpaceX as a brand because Elon Musk is one of these people who says he doesn't invest in marketing, he doesn't invest in branding. Is it the brand of SpaceX or is it the ambition that's captured through SpaceX?

Hasan: If you ask me what SpaceX means to me, it's the next gen thing – really hard innovation, real innovation. It's not building just another app for something, which we have been doing as an industry for several decades. What is the big bang which has happened?

This is a cool thing, and where really the next leap lies. We, or our kids, might be able to travel and live on other places. That's really commoditizing and bringing mainstream that space travel. But from a design and aesthetic and a product point of view, it's an amazing achievement. It is engineering in general, so as an engineer I'm probably focused as a brand on that side. It's very hard to make simple things. It's very, very hard to make simple designs, and you have an example of Apple.

But the designer doesn't work without robust nest and scalability and service levels. I used to use Ubuntu and Linux, I come from the other side of the table. I was the guy who would not use Windows, thinking, I don't like it, I don't want to get logged into their system. I would rather prefer Linux and compile my own kernel and all those different variables needed to use a laptop. Then one day I switched to Apple, and it had the same core, which is the BSD core of Linux. But the product itself just works, the most important part. It's not only the design, but it also just always works. It never lets you down. That is what changes something from other competitors or other products.

Ben: [00:56:40] I also think that Elon Musk is being a bit disingenuous when he says he doesn't invest in marketing, because product is marketing and placement is marketing. Having Tesla showrooms at the center of every major city is marketing. Anyway, let's move on. The last one is a productivity hack. So how do you make sure that you are productive every day in your role as a wartime CEO?

Hasan: It's really hard. Something I read from a blog from a company, also YC alumni, they've built an amazing tool called superhuman and they talk about gated calendars. How to make sure that the years, you have enough time for concentrated work versus just changing context from one lawn to another meeting and now with remote. It’s just going crazy. It's a very good read about, if you can stack together, for example, in my case, your one-on-ones on Mondays, or your reports, if you have any. They have their one-on-one on Mondays, then it goes down on Tuesdays to a specific set where everybody comes in with a clear idea of what we didn't talk about, and you have those pizza type small meetings like Amazon. Then Thursdays you have a full committee. Everything which revels from Mondays to Tuesdays can be touched on Tuesday, and then your still have two days away from managing meetings into concentrated work.

Ben: I think that's an excellent step, particularly in the remote world. The mental gymnastics; jumping between meetings, clients, it’s tough. I think that's an excellent productivity tip. Hasan, I've really, really enjoyed this conversation. Thank you so much for coming on the show, I'm looking forward to doing this again sometime.

Hasan: Thanks a lot, Ben. Really appreciate it.

This podcast is part of a series of Structural Shifts by Aperture. To learn more about it, visit www.aperture.co. Originally recorded and published by Aperture.

HUBUC blog carries no ownership of that material.


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