Accounts are the basis for all money movement activities in both the digital and physical worlds. Because of this, accounts are at the heart of enabling the Embedded Finance opportunity and providing an automated and compliant approach to creating these accounts is one of the most basic capabilities a Banking-as-a-Service (BaaS) platform can provide.
There are several different types of bank accounts that individuals and businesses can open, each serving a different purpose and offering various features and benefits.
In this explainer we will focus on three main types of accounts that can be created and dive into their differences, their advantages and how they can be used by enterprises venturing into embedded finance. We’ll also look at where account opening sits in the embedded finance process.
The Three Main Types of Account
1. Demand Deposit Account (DDA):
- Definition: A deposit account is a type of bank account where you deposit money, and the bank holds the funds for safekeeping. It's a financial arrangement where the customer entrusts their money to the bank, and where the bank pays interest on the deposit deposits.
- Nature: Deposit accounts are on the "asset" side of the customer’s financial picture because they represent money they own. These accounts include savings accounts, checking accounts, money market accounts, and certificates of deposit (CDs).
- Function: In a deposit account, you can store your money, make withdrawals, and perform transactions like paying bills or making purchases. Banks use the money in these accounts to provide loans to borrowers and generate income.
2. Credit Account:
- Definition: A credit account, also known as a credit line, is a financial arrangement where a lender (usually a bank or credit card company) extends credit to a borrower. The borrower can use this credit to make purchases or obtain cash advances, with the obligation to repay the lender with interest.
- Nature: Credit accounts represent a liability to the customer because they involve borrowing money that needs to be repaid. Common examples include credit cards, personal loans, mortgages, and auto loans.
- Function: In a credit account, the customer can spend money up to a predetermined credit limit. The lender charges interest on the outstanding balance, and the customer is required to make regular payments, which include both interest and a portion of the principal, until the debt is repaid.
3. Secured Deposit Account (SDA):
- Definition: A secured deposit account, or secured credit card, is a unique financial product that combines elements of both deposit and credit accounts. It can be used by individuals with limited or damaged credit histories who want to build or rebuild their credit, but can also provide needed functionality for individuals who have no need or interest in building credit.
- Nature: A secured deposit account requires the account holder to make a deposit (usually equal to the credit limit) as collateral to secure the credit limit on the account. The deposit serves as a guarantee to the lender that funds are available to cover any potential defaults.
- Function: With a secured deposit account, customers can use the associated credit card for purchases just like a traditional credit card. However, the key difference is that their spending is limited by the amount of the deposit they've made. The account provides the ability to move funds in and out via an external bank account, as well as perform account-to-account transfers for on-time payments. These on-time payments can help improve their credit score over time, allowing them to qualify for unsecured credit products.
The Account Opening Process
Enterprise-grade BaaS platforms like Bond are designed to offer financial services and infrastructure to businesses, enabling them to integrate banking and financial capabilities into their own products and services.
It is important to note that while Bond’s platform facilitates the opening of accounts, the accounts themselves are held at the sponsor bank assigned to your program. This means that all accounts are FDIC insured and come with a routing number and unique account number making all sorts of money movement possible.
The ability to facilitate the account opening process programmatically is a fundamental aspect of our platform. Here's some detail on how this works:
- API Integration:
Bond provides a set of APIs (Application Programming Interfaces) that businesses can use to interact with the banking services available on our platform. These APIs allow for the automation of various banking processes, including account opening or creation.
- Customer Onboarding:
When a business wants to offer its customers the ability to open accounts (deposit, credit or secured deposit accounts), they can use Bond's APIs to initiate the onboarding process.
- KYC/KYB (Know Your Customer/Business) Verification:
During the account opening process, businesses can utilize the Bond’s platform's capabilities to collect and verify customer information, such as identification documents, proof of address, and other KYC/KYB requirements.
- Account Type Selection:
Businesses can use the APIs to specify the type of account being opened, such as credit, deposit or secured deposit, and customize the account features and options based on customer preferences.
- Funding and Initial Deposits:
Bond’s platform APIs also allow businesses to facilitate the funding of the newly opened accounts. This can involve options like linking external bank accounts, initiating transfers, or accepting initial deposits.
- Compliance and Regulatory Checks:
Bond’s platform will conduct necessary compliance checks and verify that the account opening process adheres to regulatory requirements specific to the jurisdiction and type of account.
- Account Activation:
Once all necessary steps are completed and the account is approved, Bond’s platform will allow you to activate the account and provide the customer with access to their account details, online banking, and other services.
- Card Issuing:
Once an account has been created and activated, Bond’s platform provides the option for automatic issuing of both or either a physical card and a virtual card attached to the account. Physical cards are issued in an ‘inactive’ state and must be activated by the user, while virtual cards do not require activation.
- Ongoing Account Management:
Beyond the initial account opening, businesses can continue to use Bond’s Portal for ongoing account management, such as facilitating transactions, monitoring account activity, closing, deactivating or closing accounts and handling customer support inquiries.
- Reporting and Analytics:
Bond provides business stakeholders with access to all the data they need to create customized reports and analytics via webhooks. In addition, Bond provides an intuitive web interface referred to as Portal that allows businesses to gain insights into customer behavior and account usage.
Once an account is created, it can be funded in various ways including ACH transfers and Payroll Direct Deposit contributions. Other methods of account funding including Remote Deposit Capture (RDC) are on the product roadmap.
It's important to note that while BaaS platforms like Bond provide the infrastructure and tools to automate account opening, businesses are still responsible for ensuring regulatory compliance and adhering to industry standards in terms of customer due diligence and fraud prevention. Additionally, the specific features and capabilities of BaaS platforms can vary, so businesses should carefully evaluate their options to choose a platform that aligns with their needs and compliance requirements.
What Can a Business Do With Accounts?
As mentioned before, the opportunities made possible by the ability to open accounts for your customers is tightly linked to the opportunities generally provided by embedded finance as a whole.
Here is a brief summary of some of those opportunities that start with your ability to open accounts for your customers:
Enhanced Customer Experience: Companies can provide a seamless and convenient customer experience by integrating banking and financial services directly into their platforms or applications. This can lead to increased customer loyalty and satisfaction.
Monetization and Revenue Streams: Offering financial services on top of accounts allows companies to generate new revenue streams through account fees, interchange revenue, transaction fees, and interest income.
Cross-Selling Opportunities: By providing access to banking services, companies can cross-sell their core products or services more effectively. For example, a fintech offering business loans could also provide business accounts, simplifying the financial management of their customers.
Data-Driven Insights: Access to financial data from customer accounts can provide valuable insights into customer behavior and financial needs. Companies can use this data to tailor their offerings and marketing strategies more effectively.
Financial Inclusion: Embedded finance can help extend financial services to underserved or unbanked populations. This can be a socially responsible business opportunity while tapping into new markets.
Customized Financial Products: Companies can create customized financial products and accounts to cater to the specific needs of their customer base. This level of personalization can be a competitive advantage.
Ecosystem Building: Companies can build ecosystems around their financial services, partnering with other businesses to offer a wide range of complementary services, such as insurance, wealth management, or payment processing.
As the enterprise-grade Banking-as-a-Service platform, Bond continues to reshape industries by enabling a wide range of companies to participate in and benefit from embedded finance while providing customers with more accessible and tailored financial solutions.
If you’re interested in learning more about how our platform works or want to discuss a business opportunity, please reach out to us here.