How Banks Can Create a White Label Response to BNPL Threat

Jim Marous:
Hello, and welcome to Banking Transform. I'm your host, Jim Marous, owner and CEO of the digital banking report and co-publisher of the financial brand. The need for quick innovation is greater than ever. With advanced, cost efficient solutions needed by legacy banking organizations to keep pace with a fast moving digital landscape. One option is to deploy white label banking solutions in partnership with a third party by using application program interfaces, APIs, banks, and credit unions can quickly respond to new challenges such as buy now pay later product. On today's show, we have, Tushar Srivastava, co-founder and CEO of Skeps. He will discuss how traditional finance institutions can use third party solution providers to out perform traditional product development processes.

Jim Marous:
Major changes consumer behavior over the past two years have opened the door to innovative digital credit solutions making buy now pay later a near necessity for traditional banks to retain their customer base. Unfortunately, most banking organizations have innovation in product development processes that tend to be slow, complicated, and often expensive. One option is to use white label solutions to provide a company branded front end with advanced digital solutions already created by third parties for the marketplace. As I mentioned, I have Tushar Srivastava, co-founder and CEO of Skeps on the show today. Welcome to the show Tushar, before we start, could you give us some insight into the history of Skeps?

Tushar Srivastava:
Absolutely. First off, Jim, thank you for having me and giving this opportunity. I appreciate it. And Jim, the history of... Skeps is a technology platform. It's a three year old company. And the whole purpose of putting Skeps together is to build a set of capabilities which can sit side by side banks existing system, and enable them faster speed to market to bring their products, which could be created products, new products, installment loans, to their end consumer using the technology as a white label technology. That was the idea and genesis behind Skeps.

Jim Marous:
When you started Skeps, what was the problem in the marketplace you're trying to solve? Also, can you explain a little bit of about how your unique blockchain decentralized architecture helps to solve this problem?

Tushar Srivastava:
Jim, when we started Skeps, my prior background is I have 14 years of experience in a consulting role to the top credit card issuers, FinTech players, regional banks, and mostly in the payment vertical. When we were like... In my prior life, when we were working with the banks, there were some of the key challenges which we saw, particularly when a bank and a merchant relationship, which are like mostly the co-branded relationships. We saw there were a couple of challenges. One is that merchants were struggling or both banks and merchant were struggling to increase the approval rate because all banks have a credit box and they are good to serve within their box. But if you want to expand beyond that credit box then banks doesn't have a solution and merchant need a solution. There was a problem of approval rate on the merchant.

Tushar Srivastava:
Second problem was that merchant sits on lot of very rich data based on the customer, like their loyalty programs, their interactions with the merchant, which are only accessible to the merchant. And it's a very rich data in terms of great approvals, giving premium offers. But it's very difficult to move that data to the bank for decisioning system because of the compliance. These are the two challenges which we saw very close. And that two challenges was almost a genesis of putting a platform together to solve how a merchant can work with multiple banks or lenders to solve for credit spectrum and product coverage. And second is how to enable sharing of data while keeping within the current regulatory and compliance constraint. If you think about now that is where the technology helps the newish platforms like blockchain or decentralized system or DLT distributed ledger system do help to solve this data sharing.

Tushar Srivastava:
What we are able to come up with this platform is that without moving the information, so what is there in the merchant environment regarding to the customer that is stays in merchant environment. What is the bank proprietary information with regards to their proprietary underwriting logic and all stays within that. But using this distributed leisure technology, DLT, we are able to combine this information in a right regulatory and compliance framework to unlock the value for the consumer. Now using this technology, our banks are able to leverage much richer data, which is existent at merchant end and extend high quality offers of premium offers to the end consumer, which ultimately helps consumer getting the credit and increasing the merchant sales.

Jim Marous:
Well, buy now pay later is obviously a very hot topic with market leaders growing quickly, some recent consolidation and a lot of traditional and FinTech organizations, really in a situation of playing catchup, what you see as the biggest trend right now in the marketplace as it relates to buy now pay later?

Tushar Srivastava:
Absolutely. No, this is, we all agree that buy now pay later right now is a fascinating space to be in for a couple of reasons. One is that buy pay later is really one of the innovative product which has happened in my opinion, post credit card. Credit card as an instrument now buy now pay later, after a very long time, is a really innovative credit product has come to the market, which enables consumer to get short term credit on their day to day purchases. Now you are right as usual, the Fintechs have come to the space and shown how the product can be distributed from a technology point of view. They've shown how this product will work with the consumers, how this product should be set in the technology stack, but the second phase or the right phase would be this product to become universal.

Tushar Srivastava:
Ultimately banks have to come to the party and join the party, right? That is right now, what you are seeing is that right now we are at the juncture where everyone believes that this is a right product for the consumer. It does unlock value, and it is truly an innovative credit product in the market. Now, what banks are trying to do is that banks are trying to enter and see how they can offer this product to their customer, either with their merchant partners or within their own ecosystem. And this is where we are right now industry, but it's still a long way because how this product will mature or how this product will sit in the market. It's still a long way to go to figure it out.

Jim Marous:
Well that's a big point is that right now, even major FinTech payment players are looking to buy now pay later solutions. And really in a situation, they were a little caught off guard. They really weren't able to innovate. They weren't able to build products that massed that, but this puts a lot of legacy banking credit options at risk, doesn't it? Because, if buy now pay later, keeps on getting bigger and a financial institution doesn't have an option out there in the marketplace that a consumer can very quickly access. They could lose a lot of customers and they can lose a lot of merchants, couldn't they?

Tushar Srivastava:
Jim that is right, that there is some risk to that, that they will loose. I think the way you have to think about that, where this product sits. If you look from a consumer point of view, the value proposition for this product from a consumer is that they can, like the typical profile of the consumer who are using this product today are Gen Z millennials. And if you think about it, these are the people who have not a very rich credit history because they don't have mortgage. They don't have huge auto loans like multiple car loans and all. They're either new to the credit journey, or even if they're in their thirties and all they're still have not built a credit report, which traditional a prior generation used to have, right? Because people used to have mortgage and all.

Tushar Srivastava:
What it means that they're not eligible for traditional credit products in the market, they cannot get a 5,000, $10,000 credit card from the duration. What it means that these people now at the time of the purchase, this buy now pay later is offering a short term credit in real time to these consumer to take a purchase and split that purchase over a couple of paycheck cycle, like three paychecks, five paychecks, six paychecks. Very real product for them. Now, if you think about, that is why this product is getting attraction. Now, if you looking from a bank point of view, there is an advantage. Yes in a short term, banks are at a risk of losing these customers because these customers are going to the new age players, but in a long run, these new age players also have challenges.

Tushar Srivastava:
The challenges new age customers have that on a single transaction, that economics are not that high, where you may money on a single transaction. The way you have to think about, and that's how bank have done all the way along that you get a customer by opening up a checking account, you offer them some pay features like free DDR, free overdraft fee. But then you can sell them mortgage accounts and other products over a life of the customer and that's how you make money on the customer, by solving their problem and all. Now, that is where the Fintechs are struggling, that they don't have a subsequent product to sell these customers. Now, banks have, on the other hand, they have huge set of products to sell them. It's just that they need to get these customers at the right time. The answer is to your problem.

Tushar Srivastava:
I don't see it in a short term. Yes, we are seeing some cannibalization or some shifting the spin, but in a longer scheme of think, if you think about that, this will be one additional product in the suite of products, which banks will offer. That customer if you are new to credit, you can come using this product, but then I can graduate to your traditional credit card. I can give you higher credit card. I can give you auto loan and mortgage, and then you can build that product. I think in a slightly longer, and this will sit very nicely in the ecosystem. And the last thing, which I will say that this is an opportunity for the bank to play into the financial inclusion.

Tushar Srivastava:
We know we have been talking about financial inclusion for a very long time, that how to bring this population into the mix. Now, this is a great tool where by extending 300, 400, $500 credit, you are enabling customer to build credit history with the bank directly. And once they have some kind of a payment behavior with them after three months or six months, they can gradually migrate them to the more comprehensive credit product, which will never. I think this is a great tool for banks to do the financial inclusion and give it back to the society. I think leveraging technology.

Jim Marous:
What advantage does Skeps bring to the marketplace that a financial institution couldn't do it themselves?

Tushar Srivastava:
Absolutely. Jim, now think about that traditionally, the banks have always distributed a product through their branches or through their own website. If you have to get to AMX card, American express card or the Chase card, you have to go to their website, apply for a credit card and they will give you. Now buy now pay later is a very different product, where the product needs to be set on a merchant website. So when you are buying a washing machine or you are buying a kitchen appliance, it says that you can get this appliance as $150 a month. Customer are not required to go to the bank or the lender website to get this product. That means that now banks have to go and integrate their offering inside merchant ecosystem. Whether it's you walk into the store, you walk into the online website, you walk into the mobile app of the customer.

Tushar Srivastava:
Now that is the gap which Skeps is bridging that we are building a very modular light cost technology to the banks, which enable them to do these integration very quick and bring their products through. Now the second thing is when you talk about this integration, then the concept of scalability comes, how many one on one integrations a bank can do? That is where now Skeps is creating a kind of a many to many relationship where Skeps platform can sit inside many merchants and then bank by just connecting one time into Skeps can get access to all these merchants quickly. Those are the two. One is that enabling the connection and then the scaling of the connection. That is what Skeps is bringing to the table.

Jim Marous:
Your technology and your platform obviously increases or shortens this amount of time it takes to get in the marketplace with a buy now pay later solution, but it also puts amount of competitive level playing field against a lot of these bigger players that are out there right now, the [Clarines 00:13:17] and the firms and companies like this. Now is your technology something that's available to organizations of any size?

Tushar Srivastava:
No, absolutely. Jim and yes. Answer is yes. We work with very large banks and we are also talking to the credit unions and small community banks. And the idea again is going that if this payment matter has to become universal, every single organization needs to come to the party and enable it for their own offering. So the answer is yes, all institutions. And that's why we built a technology. Now, what we are proud of that in the last three years, we have built a stack, one, which is a regulatory and which have the right regulatory and compliance practices so that it can sit inside banks and credit unions because fortunately or unfortunately they are subjected to too much rigorous regulatory practices than some of the Fintechs can get away with, right? So we know, but then we design the right technology, which can solve those problems.

Tushar Srivastava:
Because those are the right problems to solve if you need to scale up. And just to give you an example, like last time we onboarded a bank on our platform, right? From the get go, just to take us 12 weeks, to enable a bank, to offer this whole product to their core brand partners in 12 weeks times. And that is something which we are improving upon every single day.

Jim Marous:
When you look at your platform then, you not only provide a good credit platform, but you also provide an ability to collect data, which is important because that payment data is important from the standpoint of additional products and services. When you're out there knocking on the doors of banks and credit unions, what are the challenges or what are the hesitations they see around implementing your service? In other words, what are the barriers that they see as to not go ahead and go forward with your solution?

Tushar Srivastava:
Very good question around it. Jim, and I think you... Two things I will touch. One, is what are the challenges they're seeing? And the second is around the data. Let me handle the data part later. The key, I think the story is that most of the banks and credit union have come to their terms that they do need to participate in this buy now pay later scheme and offer some kind of a solution to their customer. Now, there are a couple of challenges they're seeing. One is the unit economics of this product. As I said, that sometimes making money on a hundred or $200 transaction is difficult because there's very little money on the table from a customer point of view for a $200 transaction. That is where I just saw where I said that now banks are looking at more as like a feature set, like for extending a 200 or $300 credit.

Tushar Srivastava:
And by getting a customer, I can sell more products in future to the customer. It's value added by spending 200, $300. You are getting a new customer to your franchisee, and that's how they're building their economic models around it. That rather than focusing on a transaction, they're thinking about lifetime value of acquiring a new customer. That is one thing, how banks are getting over the hurdle. And that is the education we are doing, that how this PNL will grow, that it is not an unprofitable product, but in the long run, it can be a profitable offering for your customers. I think the unit economics and all those are the biggest. And the second hurdle is how to bring merchant connectivity in place, right? Because they don't have a merchant relationship. I think that is where the two concept of Skeps are helping.

Tushar Srivastava:
One is that given that we are building a network across merchants, so that is offering to create unions and all that by just plugging into Skeps, you will get access to the large merchants. If your consumer is coming to a large merchants like Airbnb or Home Depot, and again, I'm not saying that these are the partners, but conceptually, if Skeps has these partners, then a credit union customer, when they come and land on these big merchant website, credit union will have an opportunity to extend the credit or the solution for their known customers in real time.

Jim Marous:
It's interesting. One of the dynamics, as I understand it though, is that a finance institution has to look at credit slightly differently. Because these are small term loans where as you mentioned, a lot of the credit files, the people that want the buy now pay later, they're not as thick of a credit file. They may not have any credit on file. A financial institution really has to look at credit differently. Is this a challenge for a lot of organizations to think along the new lines of credit availability for the underserved or the people that are most likely to want to buy now pay later solution?

Tushar Srivastava:
Absolutely. Jim, so you are a spot on how you articulated it. That first is yes. If you look at a typical profile of the buy now pay later customers like 60 to 65% of are the debit card users. They don't have a... They don't either... They have a credit card, it could be secure credit card or very low limit credit card because they have thin files or they don't have a rich credit history. Yes, if you go with a traditional underwriting tools, you will not be able to extend credit to them. Absolutely yes. But then on the other side, you see that this population is growing. And as I said that the consumer behavior about how they're building their credit history, what things they value in life is also changing, right? The house ownerships, the car ownership in the world of Uber and all are changing.

Tushar Srivastava:
It's still, we will all see how that will pan out in the next five, 10 years. When you look at the FICO distribution of the whole population of US, how that is changing, but then at the other side of it, you're right. Like if you look at that, these are the customer who's saying that, look, I am going to buy a $300 laptop or whatever, and I want to split this purchase over next four paychecks. That's what they're asking for that I want to split this with 50 or $70 on this four paychecks. You are not extending a $5,000 credit line. There is no reason to bring your traditional credit tools in underwriting. Yes, there is a new way of thinking about how you will underwrite these transactions. And also how you think about the losses around it.

Tushar Srivastava:
As I always said, right? That you are, if you start thinking about as a cost of acquisition of a new customer, then the whole dynamics changes how you think about credit. Because now you're saying that, "Look today, I spent $500 to give a reward on a new card that you get 50,000 loyalty points if you sign up for a credit card." Now you are taking that money and you're saying that, "I am giving a $200 to the customer and let him for a product." And then in the next four or five months, I will see how this customer credit works with us. Is he paying on time? If he's paying on time, good, I will extend more line to them.

Jim Marous:
Right, I mean, it really is down to... Leadership has to rethink the way they view credit, the way they look at innovation, the way they look at partnering with third party organizations for white label solutions. And in order to get a foothold into these very rapidly growing scalable solutions and to build a cross sell capability into other services that traditional financial institutions have, but buy now pay later solutions organizations don't have, you really have to think differently about credit. You have to think differently about the consumer and the lifetime value of the consumer. You're really looking at... You're looking for organizations that really want to innovate at scale to reach a broader audience, aren't you?

Tushar Srivastava:
No very want exactly like this solution and exactly that you have to go to the scale. And that is what we are offering is that, "Look, this is a white label offering, which makes sure that either you can sit by the side and see how the market is evolving, right? How this thought process is changing, or you can be an active participant in this process at a smaller scale." In that process, you can go to the Speed market and start offering buy now pay later in a smaller segment, you collect data, you understand how you need to think differently about the customer. What kind of customers are coming together? What kind of products they're asking? Rather than sitting on the side and seeing, you start collecting the data, because unfortunately this is such a new product. There's no intelligence or data or roadmap available that how you go about it.

Tushar Srivastava:
That is the thing which we are saying to the financial institution that, "Look, we are not here to make ourselves the platform where you will always scale up." We are offering you a capability, which helps you accelerate your entry into the market, understand the market by playing into the market, understand the consumer behavior by playing in that space. And then how you scale up is something which will be very... If you still want to use our platform, you can use it.

Tushar Srivastava:
But our platform also provide a flexibility to bring all these components or some of these components in house as you mature, because we have to respect the bank processes that some of these things where bank would like to set them in house rather than completely taking it on the third party all the time. And that is another feature, which we have on the platform that's very modular. If you are taking one to 10 components, you can choose which components you need today. You may need all. And then in six months, 12 months, 24 months, you can decide what are the components you want to bring it in house because they should sit inside the bank.

Jim Marous:
We've been talking consistently about the buy now pay later solutions, but you really offer a lot of POS solutions for both financial solutions and merchants. What are merchant partners telling you about the products you're offering and the partnership with not only Skeps, but with the financial institutions that you're partnering with.

Tushar Srivastava:
Great question Jim, then now we are looking from a lens from a merchant point of view, right? When you look from a merchant, we are already discussed that the need to work with multiple financial institution, just to increase the coverage around the credit spectrum, right? You need a solution for a 350 FICO and also for an 850 FICO customer. And then, but the next thing is, comes to product diversity. Because when you think at a merchant, they are selling maybe 200 or $50 transactions. But at the same time, they have SKUs, which goes up to 5,000 or $10,000. When we look at buy now pay later, we look at it as one of the products which sits nicely for a 200 or $300 transaction. But once you go to the 700, $2,000, $5,000 transaction, you are talking about a traditional point of sale financing where you need 48 months product, 60 months product, 20,36 month product.

Tushar Srivastava:
Our platform is product agnostic. You can do paying for, or you can offer 60 month product and the platform is capable to handle it. From a merchant point of view, it's actually very, that is what they're looking. They're saying that, "Look, we want to integrate one payment options, which can provide monthly flexibility across all mysql ranges. Now, from an point of view, they're asking that like, yes, there is a one issuer, which is very good in paying for, but then I need a six months or 12 months and forty eight month option, can you bring another one who can provide those set of offering?

Tushar Srivastava:
And that is what we are facilitating on behalf of our merchant partners to bring them a right product. Now, again, we are not creating a marketplace. We are not creating competition among lenders. We are not saying that, "Hey, you have to bid for it." What we are trying to solve is really the merchant problem that for every product they are selling, do they have a right monthly payment option for their consumer. And if not, then can we bridge that gap by talking to different issuers? And that is where the reason is that United States has 7,000 issuers is because each one of them have their unique value add in the system.

Jim Marous:
Looking at the marketplace overall, what do you see it's the biggest in the payment market in place today?

Tushar Srivastava:
That there are three challenges, which people are facing. One we already talk about is scalability, because these one on one integrations is not sustainable. The reason like you think about like how credit card problem solved, you can have a credit card of American express. You can have a credit card of Chase and you can go to any merchant and you can do the transaction exactly the same way, irrespective of what bank credit card you're carrying. Even if you're carrying a credit card of a community bank or a credit union. Now that is the kind of a standardization needs to happen in the buy now pay later space. So that this is not that, "Hey, you are using just one issuer. And this is how the application process are." There should be some kind of standardization happens so that the consumer can get the buy now pay later exactly in the same way, depending upon as they go from merchant to merchant or as they take the product from bank to bank.

Tushar Srivastava:
The second problem, which I will also say is that today, one thing, if this has to become a payment method, then the have to follow some of the good things, which Visa and MasterCard have provided around reg Z consumer purchase production. Those are the things like, "How can consumer trust that if I am taking this product, I'm getting..." Someone has to build rules around it that look, if this product is getting offered, then this of protection which consumer is getting and consumer can trust that. I think those are the things which needs to put in place before it truly achieves its scale.

Jim Marous:
It's interesting now on all my podcasts, I continually recommend to financial institutions, the importance of reaching out to third party providers that can help them innovate, produce products and deploy in the marketplace at speed. We no longer have the luxury of product development that takes a year or two years. We really have to do it quickly. And you mentioned an example of an organization getting it on the streets in a really quick period of time. When you look at the future of third party product development and white label product development, what do you see as the future? Not just in fine out pay later and not just in credit, but overall, what do you see as the future of organization like yourselves that use the blockchain technology to develop new services at scale, that can be deployed across all organizations in a relatively short amount of time, in a way that's both secure and meets regulatory guidelines.

Tushar Srivastava:
Jim, you are right. Let me address it this way. If you look at from a technology, so technology is changing at such a fast space and also the demand of the technology. Even we have come a long way when we started in the last three years. On day one, when we conceptualize the platform and how this platform is changing on in three years, journey is phenomenal. We can tell you how different it has become, but the reason it has become different for the all the good reasons is that think about the challenges which we are solving versus which bank would solve. Suppose If I have been developing this platform inside a bank, I will be developing for a single use case. I will be developing a platform to solve the bank's problem, right? Because you're sitting inside a bank and it's very natural.

Tushar Srivastava:
I'm not saying like more smarter, or we are doing an anything different is just where you are sitting in an ecosystem. And what is your problem statement? Today my problem statement is not to bring buy now pay later. My problem statement is to help any bank to bring buy now pay later in an accelerated banner. You see, right? Even the problem statement of the same platform is very different when you sit inside bank inside, is that, "Yes, let's build a buy now pay later," which bank? My problem with statement is that build a platform which any bank can use to launch buy now pay later in 12 weeks. That is the difference. When we are building a component, when you are thinking about an architecture around it, it's a very different approach to architecture when I will be sitting inside the bank.

Tushar Srivastava:
And then also, if you want to start working with multiple banks, your architecture automatically starts to grow because now you are bringing much more modular functionality as you're working with the clients. Then that itself becomes an asset. That is how I see that. I don't think technology is a big, over a period of time technology levels up, like unless, until you know it. I don't think banks are losing on any IPS and all because the technology is very quickly changing. It's not that if I build an IP, it will going to stay forever and will become a key differentiator. Banks where their motive is, what their consumer base is, what their credit decisioning is, what, how they manage the risk. And that is what their best at. Outsourcing the technology it's not a...

Tushar Srivastava:
I don't think it's becomes any kind of a competitive disadvantage in the long run, given the space, how these things is evolving. I think in the long run, this white label platform will have a big role to play, and I think they can exist scenario. And that change last thing, which I will say, "We've seen that change, like if I could roll back 10 years." I think banks are very susceptible to work with the white label platforms or third party players to expose. But in the last six, seven years, we have seen a tremendous shift in that where they're open to this open banking idea, leveraging the API structures of the third party platforms.

Jim Marous:
If an organization is looking to deploy a buy now pay later solution within their finance institution, that's going to impact the entire community and all the merchants that are possible, how do they get ahold of you and how they find out more?

Tushar Srivastava:
Very interesting question. I'm still figuring out, but Jim, that thing is that we are like, "We are present, we have a website." Where you can come to our website, Skeps.com. We have demo portal request where you can request us and we can reach back to the bank around it. And then, that is how we are. But we are actively working with lot of consulting companies and around to make sure that we educate people about our solutions and if their clients are looking for something out there, they can evaluate us.

Jim Marous:
Yeah and I will give kudos to your team in preparing for this podcast. You have a lot of content on your site and it answers a lot of questions that an organization would have about, geez, how would I possibly work with a third party provider to deploy a buy now pay later solution. That's going to be competitive. And it's also going to be able to be scalable. And as you mentioned, the product itself is not the biggest profit maker, but it's how it goes across different organizations and different product lines that an organization already has. I really encourage organizations if you're considering this as an option to go to the Skeps website, look at some of the content they have. Read about what's going on not only in buy now pay later, but third party and blockchain technology. And what's going on in the overall deployment of third party solutions in a marketplace that is running faster every day. Thank you so much for being on this show today. I really appreciate the time we spend and I wish you well,

Tushar Srivastava:
Thank you so much, Jim. Likewise, it was nice speaking with you and thank you for the time.

Jim Marous:
Thanks for listening to banking transform. Rated as a top five banking podcast and winner of three international awards for podcast excellence. If you enjoy what we're doing, please take a few moments to give our some love in the form of review. It really helps us continue to get great guests. Finally be sure to catch my recent stories on the financial brand and check out the research you're doing for the digital bank report. Also, if your organization is looking to reach a new marketplace with a podcast interview such as, today's be sure to reach out to us and see if we can't do an interview for you. This brand reproduction of everyone in podcast, a special thank you to our producer Leah Longbrake, audio engineer, Sean Roll Hoffman and video producer will Pritts. I'm your host, Jim Marous, until next time, remember a firm's advantage comes from feeling market changes faster and taking the size of action faster.