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ok so followup question - lets say i buy this message and want to start "Banking for Medical Students" (well known gap, they have terrible credit history but ar

by swyx 4y ago

ok so followup question - lets say i buy this message and want to start "Banking for Medical Students" (well known gap, they have terrible credit history but are about to be good credits). The precise segment doesnt matter, my question is - how much of the banking capital requirements do i need to put up? because a bank isn't just about payment rails and credit cards, its also about having literal cash in the bank right?

deleted 4y ago
[deleted]
zachthewf 4y ago
These startups are not actually banks—they will partner with banks that fulfill those capital requirements. For example, the Robinhood debit card is issued by Sutton Bank [0], a 100 year old bank in Ohio that very successfully provided the backing bank to a bunch of hot new fintech products. So you would have to go through Sutton bank or another bank, but I think there are enough of these companies now that there's a fairly tried and true path. If you're seriously investigating this I can connect you to people who know more about it than I do. [0] https://robinhood.com/us/en/support/articles/robinhood-debit-card/ https://robinhood.com/us/en/support/articles/robinhood-debit... and ctrl+f "Sutton"
unethical_ban 4y ago
What I imagine is that there is either some kind of delegation of lending here, or that you get the backing/start a bank on your own and utilize this service to do the needful around account servicing more easily
bob1029 4y ago
> how much of the banking capital requirements do i need to put up? because a bank isn't just about payment rails and credit cards, its also about having literal cash in the bank right? If you want to start an actual bank, you need a charter from the FDIC. This is commonly referred to as a De Novo bank. Also known as "virtually impossible".
zhivota 4y ago
Increase will have to partner with banks to provide the service, so you won't have to be an actual capitalized bank yourself, and you won't have to go find one. You can see in the fine print at the bottom of their page: "Bank accounts and banking services are provided by Increase’s partner banks, members FDIC." The only way they can provide all this functionality is to do all the hard work of integrating with whatever legacy junk the partner bank is running (along with all the Visa stuff, Stripe stuff, and whatever else they are using here). You could actually do this yourself, and some fintechs are attempting that, but it's very hard and expensive due to the PCI-DSS requirements, among other things. I'll be curious to see if they will require their customers to have PCI-DSS or if they'll be able to tokenize everything in a way that doesn't require it. When I worked at Visa the big issue was that handling card data, even after tokenization, required PCI-DSS, which of course makes no sense, but the immune systems around the payments industry takes a long time to change.
mousetree 4y ago
None, you won't be a bank. You'll need to work with another bank (directly) or via some BaaS that has a pre-existing relationship with a bank. Depending on who "manages the program" you'll probably still have significant work to do our your side related to KYC and Compliance. You can offload this to the BaaS if they have a pre-existing relationship with a sponsoring bank but then you have very limited latitude to change how your perform KYC etc. For context, when we started, straight out of YC we worked with a company called Synapse (synapsefi.com) who had a pre-existing relationship with Evolve (sponsor bank) and managed our entire program. They were responsible for KYC, fraud, compliance etc. We basically built an app on top of their APIs. As we grew we needed more control and a direct relationship with a bank (this also improves the unit economics). We now manage the entire program and the payment rails part and banking APIs are maybe only 5% of the work involved (even within engineering a huge portion of our time is on fraud/compliance/kyc etc).

by swyx 4y ago

deleted 4y ago

[deleted]

zachthewf 4y ago

These startups are not actually banks—they will partner with banks that fulfill those capital requirements. For example, the Robinhood debit card is issued by Sutton Bank [0], a 100 year old bank in Ohio that very successfully provided the backing bank to a bunch of hot new fintech products. So you would have to go through Sutton bank or another bank, but I think there are enough of these companies now that there's a fairly tried and true path. If you're seriously investigating this I can connect you to people who know more about it than I do. [0] https://robinhood.com/us/en/support/articles/robinhood-debit-card/ https://robinhood.com/us/en/support/articles/robinhood-debit... and ctrl+f "Sutton"

unethical_ban 4y ago

What I imagine is that there is either some kind of delegation of lending here, or that you get the backing/start a bank on your own and utilize this service to do the needful around account servicing more easily

bob1029 4y ago

> how much of the banking capital requirements do i need to put up? because a bank isn't just about payment rails and credit cards, its also about having literal cash in the bank right? If you want to start an actual bank, you need a charter from the FDIC. This is commonly referred to as a De Novo bank. Also known as "virtually impossible".

zhivota 4y ago

Increase will have to partner with banks to provide the service, so you won't have to be an actual capitalized bank yourself, and you won't have to go find one. You can see in the fine print at the bottom of their page: "Bank accounts and banking services are provided by Increase’s partner banks, members FDIC." The only way they can provide all this functionality is to do all the hard work of integrating with whatever legacy junk the partner bank is running (along with all the Visa stuff, Stripe stuff, and whatever else they are using here). You could actually do this yourself, and some fintechs are attempting that, but it's very hard and expensive due to the PCI-DSS requirements, among other things. I'll be curious to see if they will require their customers to have PCI-DSS or if they'll be able to tokenize everything in a way that doesn't require it. When I worked at Visa the big issue was that handling card data, even after tokenization, required PCI-DSS, which of course makes no sense, but the immune systems around the payments industry takes a long time to change.

mousetree 4y ago

None, you won't be a bank. You'll need to work with another bank (directly) or via some BaaS that has a pre-existing relationship with a bank. Depending on who "manages the program" you'll probably still have significant work to do our your side related to KYC and Compliance. You can offload this to the BaaS if they have a pre-existing relationship with a sponsoring bank but then you have very limited latitude to change how your perform KYC etc. For context, when we started, straight out of YC we worked with a company called Synapse (synapsefi.com) who had a pre-existing relationship with Evolve (sponsor bank) and managed our entire program. They were responsible for KYC, fraud, compliance etc. We basically built an app on top of their APIs. As we grew we needed more control and a direct relationship with a bank (this also improves the unit economics). We now manage the entire program and the payment rails part and banking APIs are maybe only 5% of the work involved (even within engineering a huge portion of our time is on fraud/compliance/kyc etc).