Updated payments offerings and embedded finance redefine community banking

A version of this article first appeared in the July BAI Executive Report: Modernizing payment methods. Find more insight within the issue on topics including consumer payment preferences, FedNow and RTP, check fraud, ISO 20022 compliance and more.

Perhaps it takes modest origins to fully understand how to empower banks and credit unions of all sizes to compete in a fast-changing digital landscape. And then to help those banks make sure small and medium-sized business (SMB) customers have access to flexible products to maximize cash flow or expand their footprint when a smart idea takes off and traditional financing hasn’t come through.

Pathward, a nationally chartered bank that these days focuses on Banking-as-a-Service (BaaS) and commercial finance via turnkey solutions for other banks and credit unions, had its origins as an Iowa Savings and Loan in the 1950s. It reemerged as First Federal Savings Bank of the Midwest in the 1990s. With the new millennium came new thinking about shifts in digital financial services and in 2004, the organization launched its Meta Payment Systems division, which sold banking technology and infrastructure solutions, including prepaid cards. By the following year that division was the basis for a new organizational name: MetaBank. Expansion years followed, largely through acquisitions of a tax services firm, commercial lenders and other specialties, and in 2022, MetaBank rebranded as Pathward NA.

That brings us to 2024 and a recent conversation with Pathward’s Divisional President of Banking-as-a-Service Will Sowell about his organization’s redoubled efforts to help community-focused financial services firms function just as fast, just as vigilant against fraud, and ideally, just as low-cost as larger rivals. As Sowell described in a company release for a recent product launch, he’s committed to “helping financial institutions grow and succeed in an increasingly fierce marketplace.”

Fierce, indeed. Industry wide, operators in all budget ranges are contemplating how large of a buy-in to pledge for BaaS, and similarly, for embedded finance, which by most accounts looks to further disrupt traditional banking because any industry can embed financial services offerings into its customer experience; think of receiving a home-equity loan solicitation when streaming a house-hunting show, for instance.

Pathward is already testing the waters of embedded finance capabilities, as well as growth in the payments space. Industry wide, Payment-as-a-Service (PaaS) ranks among the most popular offering within BaaS/embedded finance, says Dennis Jones, senior marketing manager at Jack Henry, writing in another article for this issue: “Payments play a major role for future-ready banks.”

BAI Senior Editor Rachel Koning Beals asked Sowell to talk about his experience in the evolving areas of BaaS, PaaS and more.

BAI: Set the scene briefly with the story of the Pathward journey. What are the benefits when you operate as a bank/fintech hybrid? 

Will Sowell: Inspired by our purpose to drive financial inclusion, Pathward is a non-traditional bank. We have roots in community banking in the Midwest but have evolved our business model to meet the changing needs of Americans, including the underserved and emerging markets. We’re now a nationally chartered bank that aims to increase financial availability, choice and opportunity for individuals and SMBs alike.

When it comes to our brand identity journey, we made a major transition in 2022 from MetaBank to Pathward. MetaBank was a conglomerate of multiple and siloed businesses. We didn’t have an enterprise approach or cross-sell effort and felt we couldn’t maximize the market and were not as efficient as we could be. As opposed to having separate business lines (commercial finance, payments, consumer lending, etc.) operating under different names, we felt the one-brand approach was best.

We worked with employees on the name change and felt like it was time to align with our brand promise. The Pathward name and branding reflect our overall commitment to charting a path forward for individuals and businesses to reach the next stage of their financial journey.

BAI: And you, Will, how did you arrive at this point in financial services?

Will Sowell: I’ve had leadership roles focused on payments over the past 20 years. Prior to joining Pathward in 2021, I was Chief Operating Officer at GreenDot and President and Chief Operating Officer of Ingo Money. At Pathward, I lead the team responsible for the company’s horizontal capabilities, such as issuing, money movement, ATM sponsorship and merchant-acquiring sponsorship, credit and tax solutions.

I live in Frisco, Texas, and recently completed my third term on the Frisco City Council.

BAI: Let’s walk through some of the market needs that drive your payments and lending technology offerings.

Will Sowell: We would argue that Pathward has been among the pioneers in the payments space because we give financial institutions the ability to partner with one bank across many solutions on a scalable infrastructure. Our solutions range from issuing to payments, to money movement, tax services and consumer credit… essentially turnkey solutions that cut out the need for banks and credit unions to drain in-house resources to build and operate these functions on their own.

Our simple systems are easy to use and cost-effective to put in place – from fast onboarding to minimal financial or staff investment. We act as extensions to the financial institution’s products. These extensions are always a supplemental product, and never meant to compete with their existing product suite.

Some of our newest offerings answer the demand for commercial finance solutions, helping businesses maximize cash flow or expand their business, such as asset-based lending and Small Business Administration lending. The second is merchant services, which empowers community banks and credit unions to offer merchant processing services to business clients. These services eliminate the challenges and liabilities associated with managing an independent program.

How we deliver in the marketplace is just as important as our suite of solutions. We have a deep bench of talent embedded in each of our functional teams. This allows us to provide partners with clear, consistent processes and guidelines simplifying their onboarding and day-to-day operations. Importantly, we also have built a robust risk and compliance infrastructure that gives partners confidence that the programs they build with us today will be scalable and sustainable long into the future.

BAI: What are you seeing from the demand side (individual and commercial customers) as far as payments evolution? And what’s likely next in the payments and embedded finance space?

Will Sowell: In terms of industry-wide trends, we are seeing expansive growth in embedded finance, and widespread adoption is happening rather rapidly. In fact, according to new data we just released, 82% of executives planning or considering offering embedded finance predict it will happen in the next two years.

Embedded finance has been proven to enhance the consumer experience through faster, frictionless transactions. Businesses can expect increased brand loyalty and customer spending as they implement embedded finance solutions. As part of the rise in embedded finance, we should also see a rise in the importance of quality partnerships. Businesses should be sure to select a partner bank with trusted experience and strategic relationships that can help them best develop their embedded finance solutions.

BAI: What are the keys to closing the knowledge gap around embedded finance?

Will Sowell: The research found that embedded finance is growing – and quickly. The data showed us that even with such excitement around embedded finance, there are a lot of steps to get executives prepared to adopt the technology. In fact, about half (51%) of senior executives do not have a strong working knowledge of the technological details of embedded finance. What’s more, 96% of executives who have implemented embedded finance admit they underestimated the complexity of the entire process.

It is critical for businesses considering embedded finance solutions to properly prepare before heading into the development stage. Businesses should first understand customer demand and determine a viable business case before moving into development. Once that is confirmed, they should consult experts in the industry who have successfully developed an embedded finance solution. Businesses should complete their due diligence by confirming a potential partner bank’s history in supporting embedded finance systems and offering a stable compliance platform.

As with any rapidly growing technology, regulatory oversight and requirements will continue to increase and should be top of mind for businesses offering embedded finance solutions. It’s critical for risk and compliance to be part of the development from the beginning in order to ensure stability.

Will Sowell is Divisional President of Banking-as-a-Service at Pathward.

Rachel Koning Beals is Senior Editor at BAI.