Making Sense of Banking Infrastructure: Sila and the Banking Industry

Banking Infrastructure: Making Sense of Banks, Middlewares and Sila

The fintech industry is full of confusing jargon and complex technology. When you’re an outsider looking in, this language can be confusing and exclusionary.

When it comes to banking infrastructure technology, there are a few key players that you should look out for. And it helps to understand how Sila fits in all that. 

Starting a Financial App: Where to Begin?

Most entrepreneurs who have an idea for a fintech company (with no experience building one) are shocked to learn the intricacies that go into fintech. Depending on the level of features that you want to provide your users, your financial app may cost thousands of dollars in:

  • Becoming a bank agent
  • Anti-money laundering (AML) licensing
  • And sourcing, building and testing different banking APIs on an API aggregator

Starting a financial app with the ability to offer high-interest checking accounts with FDIC insurance, debit cards, credit cards, smart cash transfers, eBilling, loyalty programs, and more can be done, and you don’t need to be a full-fledged institutional bank to do it.

Understanding Your Options

If you want to build a full banking experience platform or provide financial services, you have three options:

  1. Banks
  2. Banks and middleware (like APIs)
  3. Or financial platforms

While you may look at these options and wonder how they work, recognize that you can simplify the process by partnering with one single vendor (a platform like Sila) to cut down on annual cost after launch, cost to launch, and the number of vendors interactions you need.

Banking Infrastructure

Banking infrastructure is at the core of what your business needs. There are two ways of doing this. The first is to seek out banking relationships. Unfortunately, this can be hard to find. To start, if you have no proven revenue, then you’ll most likely get rejected by banks (as you are probably aware of). The second is that most banks don’t want relationships with high-risk clients. If you have anything to do with cryptocurrency or smart banking, then you might automatically be rejected. 

In options 1 and 2, fintech startups are forced to find a bank sponsor. There are more than 4,500 banks in the US, and only 50 of them actively partner with tech companies. These banks tend to be smaller institutions (those with less than 500 employees, and fewer than $10 billion in deposits) and are willing to take on new products or tap into expanding financial markets. 

Banks partner with fintech entrepreneurs by certifying that the company is to be white-label distributors of bank services, like accounts, cards, lending, and so forth. 

But what does it take to be certified by a sponsor bank? Obviously, this is not an easy task. And each sponsoring bank will look for something unique. For example:

  • Terms: Some banks have poor terms of contracts for the program managers (i.e., the startups). Many offer 0% interest on accounts, even when the fed rate is at 1%. Therefore, you’re not really benefiting from this relationship.
  • Product limitations: Even if you do get a bank to sponsor you, you may be limited in what that bank is willing to offer. Most don’t support business accounts, which can be crippling to your product offerings. Other banks don’t like to give out products like cash advance products and lending as they’d rather shift that money elsewhere.
  • Compliance: Compliance is the number one hurdle with bank sponsors. The personnel you’ll interact with at your bank won’t be experienced enough to provide high-level support on best practices for personal data. Therefore, you may be going into this relationship with no compliance support and no protection for your end-consumers unless you partner with a compliance expert and lawyer and work through these problems together. If a bank does offer this, then they won’t tell you from the start or they’ll ask a lot of money for this.

Finding a bank relationship is time-consuming. You’ll likely need to talk to dozens of banks to find a single good candidate. Let’s couple all this with the time it takes to build and launch your product after you’ve met with the bank, the compliance regulations, and the costs. And then think about your product. If you only want to develop one app that has banking features in it, then is it really worth your time to find a sponsor bank? No, not at all.

There are two main problems with working with a financial institution like a bank and moving forward with this relationship: you’ll have to invest a lot of time and money in tech and compliance. 

Here’s what that breakdown looks like:

Tech Demands of a Bank Sponsor Program Manager

Let’s say you built an app or front-end with the support of your sponsor bank and their APIs. 

With the banking API system, you’ll be forced to use the single FBO account that they designate for all your thousands of clients. This is where all your client’s money will sit as a bulk deposit. And unfortunately, it requires you to:

  • Maintain ledgers of each individual balances
  • Generate statements that are compliant
  • Built KYC, KYB, and fraud prevention APIs/solutions
  • Build a security stack to protect against data leaks
  • Implement data policies, like PII encryption or PCI compliance
  • And build layers of reporting and data access.

You also would need to generate your own software investment for additional features like:

  • Card issuance, processing, and management (like dispute handling)
  • Payment network connectivity (ACH, bill pay, checks)
  • Access to traditional banks and credit unions
  • Digital wallet issuance
  • Digital payment method options like debit card and credit card payments
  • Digital assets and access to digital currencies
  • Interest calculation and deployment
  • International payments
  • Support for a diversity of account terms
  • Crypto services and smart contracts

Unfortunately, to provide any improvements to your API, you’ll essentially need to build a full banking stack on top of your partner bank because you’ll be really limited with the service offerings that you’re given. Unfortunately, this can take up to two years of straight development. 

Compliance Demands of a Bank Sponsor Program Manager

Investment in payment service compliance is much larger than tech. And most tech founders are shocked at the amount of compliance work and knowledge required. 

In most cases, you’ll end up needing to hire a Chief Compliance Officer (CCO) before you can sign on with a bank. In doing so, your CCO will need to draft multiple policies and present them to the bank (around 15 to 20 policies), which include:

  • Compliance Management System
  • Customer Identification Program (CIP)
  • Anti-Money-Laundering Policy (AML)
  • Complaint Management Policy
  • Information Security Policy
  • Third-Party Risk Management Policy

These policies can add up to about 500 pages of operational procedures, each of which the bank will need to read and approve before launch. This process can take up to 4-6 months.

In addition to this, you’ll also need to be aware of the following compliance needs even as your product is operational.

Banks and Middlewares

If you go the route of finding a bank sponsor, then you’ll need to also be in charge of sourcing middleware that supports banking products. Middleware refers to any behind-the-scenes software that allows two levels of a product/service to communicate with each other. There are two options here; in the last 5 to 10 years, banks have started working with middleware solutions to help reduce about 40% of tech investment on behalf of fintech founders.

In a digital financial system, the middleware is most commonly an API (or application programming interface) and it allows the user/clients to interact with the bank infrastructure.

Truly, middleware is how the tech operates so seamlessly, but unfortunately, there can be thousands of hardware and software products that you need to sift through in order to find one that is secure, the right fit, and will prove profitable for a long-term investment. This is especially important because your financial product will be facilitating access to funds, payment methods, and other financial data. 

Unfortunately, most of the sourcing of middleware will come down to you. The bank you partner with won’t usually provide this. If they do, then you’ll be paying for that service in more ways than one. Additionally, the middleware must be configured to work for your needs, so you will need a full developer stack to work with.

If you do choose to go the bank and middleware route, then you’ll still experience issues:

  1. Middlewares only cut out the tech expenses, and not the compliance expenses. It’s still your job to find a bank, work directly with it and manage everything with regards to compliance.
  2. Middlewares are still expensive (and we’ll get into that down below). 
  3. You still end up investing heavily in tech. A 40% reduction means you’re still left with product and engineering work that costs $1m+.

Cost of Starting Up With Each Fintech Option

Option 1: Bank

When working with a bank, you’ll have to front the hard costs of tech and compliance, as well as legal ($80k+ for policy drafting and $100k+ for contracts with the bank and all other vendors), the bank set up, and minimums ($550–850k over 3–5 years), insurance (5 types of coverage that add up to $30k+ / year), and so many other things. 

When you add on engineering, compliance, and third-party tools, you’re looking at:

  • 15–18 months to launch
  • ~$2.1m to launch
  • ~$2.5m annually from launch

Your investment: Full tech, compliance, and bank relationship

Vendors: Average of 12 vendors to work with

Option 2: Bank + Middleware

Middlewares are another expensive vendor on your list. It’s not like the middleware will take a lot of the work off your plate. You still have to deal with 50–100 page contracts, 3–5 year terms, and monthly minimums that often exceed $30k.

  • 9–12 months to launch
  • ~$1.2m to launch
  • ~$2.1m annually from launch

Your investment: Full compliance, bank relationship, and 40% less in tech

Vendors: Average of 13 vendors to work with

Banks vs. Middleware vs. Sila Platform

After all this, you may be feeling dejected. Not only is finding a bank and middleware relationship challenging, but it’s also expensive and it’s not a guarantee that it will happen. Luckily, platforms like Sila can offload a lot of these challenges. 

We can finally dive into option 3: why a platform like Sila is the right way to go.

Let’s revisit our high-level overview:

Banks

  • 15–18 months to launch
  • ~$2.1m to launch
  • ~$2.5m annually from launch

Your investment: Full tech, compliance, and bank relationship

Vendors: Average of 12 vendors to work with

Banks + Middleware

  • 9–12 months to launch
  • ~$1.2m to launch
  • ~$2.1m annually from launch

Your investment: Full compliance, bank relationship, and 40% less in tech

Vendors: Average of 13 vendors to work with

Sila

  • 4-6 weeks to launch
  • Less than $50,000 to launch
  • Less than $50,000 annually ($24,000 plus $0.10 to 0.20 for transaction fees)

Your investment: 90-95% less work on fintech and compliance. Bank relationship built-in

Vendors: 1 vendor to work with, especially since add-ons to the Sila platform still go through Sila for seamless integration

When we compare these three options, it seems unbelievable that Sila would offer this much relief over banks and banks and middleware. But it’s true. 

With Sila as your partner, you gain access to:

  • Sila’s full SDK stack and a sandbox where you can develop and test your app
  • White-labelling
  • An ACH API