Launch online bank - finance infrastructure guide

Hi all,

I'm running a fintech newsletter https://fintechwave.substack.com/ and recently is did a research about what does it take to launch an online bank. If you are looking to launch an online bank there is almost zero useful information about how to solve banking infrastructure and banking licenses, so the below information should help you.

Launching an online bank is complicated. Since you operate with other people's money, you can expect that regulations are pretty strict. There are 4 main topics to cover here: Licenses, Banking Partner, Card Issuing and KYC.

LICENSES

When you start searching for regulatory approvals you need, most likely the first thing you will see is Money Transmitter Licence. And when you read how much money and time you need to get it, you will probably give up on your fintech idea. But is just because there is not enough information about all the options you have, so keep reading👇

The USA requires every business dealing with money to obtain regulatory licenses. Facilitating the movement of money from one person to other, or one business to the next may mean you are operating a money service business or MSB. When that’s the case, you may need a Money Transmitter License.

Each state in the USA requires its MTL license, which means you need 50 different licenses if you plan to cover the whole USA. The only state that doesn’t require MTL is Montana, so you can launch your bank in Montana right away :)

Luckily, there are two options, and we will discuss both.

Apply for MTLs on your own

Doing business through a partner institution

1. Apply for MTLs on your own.
   TLDR: it is a very expensive (up to $2M) and long process (it takes about 2 years to get licenses in all states). Currently, the hardest states to get licenses are NY and California. It can take up to 2 years to get it. Every state has different requirements and timelines. In terms of expenses there are a couple of different costs associated with MTL:

MTL application fee: depending on the state, it varies from a few hundred dollars to a few thousand dollars. The total application fee cost for all states is around $60K.

Annual License Fee: when you get a license, you need to pay an annual fee to maintain the license. Annual fees are usually a few hundred USD per year.

Investigation fee: some states require investigation after you apply for MTL and this can cost between $50 to $1000.

Net Worth requirement: since you work with the money, the state wants to get as much security as possible and one of the requirements is net worth. For example, Arizona is require $500.000 of net worth. Alabama is asking for $5.000.

Surety Bond: surety bonds protect consumers and government entities from fraud and malpractice. When a principal breaks a bond's terms, the harmed party can make a claim on the bond to recover losses. For example, in Colorado, Surety Bond for MTL is $1M.

Since applications can be complicated, a lot of companies are hiring attorneys specialized in obtaining MTLs, which of course increases the costs. From the conversations I had with experts, looks like the total cost to be fully licensed in the USA is around $2M (application fees, investigation fees, surety bonds, attorney).

For more information check this article.

2. Doing business through a partner institution
   There is a 100% chance that you will want to use this option for your fintech startup. Using a partner which already has all the licenses means you can launch quickly and with much lower costs.

Simplified, it works like this: in the fintech backend, its all partner’s infrastructure is connected to your app via API. Your fintech startup is not touching the money or accounts. Customers just use your app and UX to open an account, send/receive money, request debit cards, etc., but behind the scenes, it is all done via partner infrastructure.

BANKING PARTNER🏦
As I mention above working through a partner institution is the only way to quickly launch a fintech startup (because you don’t want to wait 2 years and spend $2M for Money Transmitter License).

The hardest thing here is to actually make a partnership deal since you are just starting and have zero revenue. Traditional banks don’t want to do business with everybody, they look out for their reputation, so you need to make sure they can see you as a trustworthy partner. If they agree to work with you, great, next step is to check what are their financial requirements.

Pricing can be tricky here. In most cases, you pay a one-time setup fee. This can range from a few thousand up to a couple of ten thousand USD. It should definitely be less than $100K.

Apart from the setup fee, there is an ongoing monthly fee you need to pay. Usually, it is the % of each transaction that is shared between your online bank and your partner bank. As we already mentioned, when your customer uses a debit/credit card there is a fee charged to the merchant, and you share that fee with your partner bank.

Also, note that most banks will ask you to commit to minimum spending. An example that I saw had a $20K monthly minimum, meaning if your partner bank earns $10K from your fees, you still need to pay them $20K for that month.

Also, another thing why you need a partner institution is access to ATMs. Your customers want to be able to withdraw cash without fees (at least a couple of free withdraws per month), so you need a partner with an ATM network.

Below is the list of the most popular online banks and their banking partners. As you can see, a lot of them are using Evolve Bank & Trust as their infrastructure provider.

Probably your best bet is to contact some of them and see if any would like to work with you and your fintech startup.

Investment services📈
In case you are looking to offer investment services, such as investing in stock for ETFs you will need to find a brokerage partner with licenses. The process would be the same as for an online bank - you build your app but the backend services are done via partner.

Until they get all the licenses, you can use providers like Drive Wealth LLC or Apex Clearing.

CARD ISSUING💳
One of the main products of every online bank is debit cards, so you want to be able to issue digital and physical debit cards to your customers. Personalized debit cards are a great growth hack to attract customers. You can offer different designs or materials.

Here are a few examples:

Treecard - the card is made from sustainably sourced cherry wood and plastic from recycled bottles.

Credits: Treecard
N26 - metal card made from 18-grams of stainless steel

Credits: N26
Greenlight - offers an option to put your picture on a card

Credits: Greenlight
Luckily there is a great solution for this called Gallileo. Galileo is the platform that supports fintech products - including checking, savings, deposits, lending, and credit cards. They even offer banking-as-a-solution, so it is possible to launch an online bank just using the Galileo platform. But, Galileo is the most famous for its super simple solution for issuing debit/credit cards.

Pricing is simple. You pay a $1000 one-time fee per each debit card product you launch. After that you pay $5 per card you issue to the customer. Every time customer uses the card, you pay up to .10 cents per transaction.

Great thing is that there is no monthly minimum, which is very important when you don’t have a huge volume in the beginning. Galileo is the only provider I could find that has transparent pricing on its website.
Another solution you might use is Marqueta. Unfortunatelly, for pricing, you will have to contact their sales, but probably they are in line with Galileo pricing.

KYC
To be able to offer online account opening to your customers, first, you need to collect some information about your customer - Know-Your-Customer (KYC). KYC is a set of standards used within the investment and financial services industry to verify customers, their risk profiles, and their financial profiles. Most importantly, it helps you avoid fraud.

There are really a lot of good KYC providers, such as Microblink or Sumsub. Most of them are self-service solutions that you connect to your app via API.

Pricing is simple - in the beginning, when you have a small volume you pay $1-2 per customer verification. When you reach more than a thousand verifications per month, you can negotiate a lower rate.
All other solutions have similar pricing. As you grow your customer base, you can always negotiate a lower price.

Full article is here: https://fintechwave.substack.com/p/how-to-launch-an-online-bank?s=w