Introduction

Both banks and their fintech customers must navigate the evolving landscape of embedded finance together to succeed and grow. While banks have core processing systems that have repeatedly passed regulatory scrutiny and gained a certain level of trust with regulators, they often may be limited by legacy technology. Fintechs seeking to offer financial services to their customers are not banks and may lack an understanding of regulatory oversight, while needing to launch quickly and flexibly. A side core can provide the best of both worlds to the bank and fintech by supporting compliant embedded finance offerings from a financial institution with the speed and agility of a virtual ledger.

According to a June 2024 report by the Boston Consulting Group, embedded finance will account for $320 billion in revenues by 2030. However, banks' legacy technology may present roadblocks that reduce their ability to win and retain fintech partners, which could cause them to lose out on driving revenue in this fast-growing market. 

Today, two common models for embedded finance offerings exist. The first, on-core, enables fintechs to integrate directly with the bank’s main core, and the second is a “for benefit of” (FBO) account with a virtual ledger. In this second model, the fintech uses a virtual ledger to process transactions, and subsequently combines the transactions into a single FBO or omnibus account with the bank partner.

The on-core model provides the reliability of a tried-and-tested system that incorporates the bank's rules and charter into aspects of its design. This model is inherently more controlled and designed to comply with applicable bank regulations, but does not necessarily operate at the speed needed for fintechs and their customer-first approach.

The FBO with a virtual ledger model is the most common approach to support embedded finance innovation, but has been the subject of enhanced regulatory scrutiny as highlighted by recent high-profile enforcement actions.

In addition to supporting both on-core and FBO models, Atelio by FIS offers an embedded banking side core solution bolstered by the market-leading compliance capabilities of FIS. Side cores allow fintechs to build new brands or products outside of the main bank core environment, while leveraging the bank core’s compliance infrastructure.  

Fintech-bank Relationship

Fintechs ushered in an entirely new class of financial services that are designed to deliver convenience, accessibility and user-friendly technology to consumers and businesses alike. They offer a wide range of services such as mobile banking, online lending, and digital payment systems. A recent study found that approximately 48 percent of Americans use fintech applications on a daily basis.

Fintechs, however, are not banks. Most fintechs are structured so that they must partner with traditional banks to deliver customer account-level services such as debit and credit cards, demand deposit accounts, lending services, and money movement. Banks hold the licenses, provide these services, and are directly subject to examination by their regulators. 

If a regulatory examination identifies violations, regulators have many tools at their disposal such as issuing consent orders which often include fines, monitorships and restrictions on business expansion. Such actions could directly impact banks and their fintech partners' businesses.

Most bank partners provide services to fintechs using legacy mainframes dating back to the 1950s and 1960s that may be neither adequately flexible to address the demands of the fintechs and their customers, nor affordable. These core systems, however, are built to handle the regulatory scrutiny and the large transaction volumes associated with traditional banking activities. While they are well-equipped for the traditional banking model, they may not be designed to support the speed, flexibility, and cost-effectiveness fintechs require to launch and scale new embedded finance programs. 

To alleviate the complexity and expense of working directly with the bank’s core, the industry turned to the FBO model where the fintech’s customer accounts are managed on virtual ledgers provided by third-party Banking-as-a-Service (BaaS) vendors with aggregated balances of one or more fintechs held on a single or a few omnibus account(s) on the bank’s core.

Complexity of Banking Cores

Banking cores that rely on legacy technology have been updated over the decades by adding new layers of technology over the old to keep up with demands for innovation. This does not, however, change some of the challenges of working with outdated systems–legacy configurations may be complex, cumbersome in today’s environment, inflexible, and unsupportive of certain technologies, such as APIs. 

The original cores were designed to meet the stringent needs of traditional banks, rather than enabling the speed, flexibility and visibility fintechs require to launch, scale, manage, and even tear down new products and programs. It can be cost prohibitive for fintechs to open individual customer accounts on a bank’s core vs the FBO model, potentially stifling the viability of a new fintech product. 

To launch new programs, traditional banking cores require configuration and often setup across multiple disparate systems, which is frequently time consuming, requires specific skill sets and can result in a lack of visibility across different programs. For example, if a bank wants to launch ACH payment capabilities, customer onboarding, or other payment modalities for its fintechs, each capability must be configured separately across several systems. A singular view of the performance of all programs across various fintechs rarely exists, which is one of the key issues for regulators and banks alike.

Without a singular view, multiple business analysts must go to disparate systems to understand the number of customer accounts, card transactions, wire transactions, etc. The most  widely-accepted option to create a singular view is to take all the existing products and different API sets and build an orchestration layer to ingest those APIs, which, considering the complexity of a bank's core technology, is typically an expensive, resource-intensive, and potentially disruptive endeavor.

The On-core Model with FBO Accounts and Virtual Ledgers

Banks have different options when structuring their fintech programs. One option is the FBO model. Programs that require innovation often rely on the FBO model using virtual ledgers. The FBO model enables consolidation of transactions from a virtual ledger into an FBO account at the bank, which saves costs and operational overhead on the main banking core. Those virtual ledgers are able to reconcile with one or more omnibus account(s) at the bank.

Using the FBO model, a single demand deposit account or FBO at the primary core at the bank may be used to manage funds from different accounts in a virtual ledger. The fintech programs often rely on third-party BaaS software to reconcile the virtual ledger with the omnibus, or FBO account(s) on the core.

While the FBO model can ease implementation and decrease time to open accounts and operational costs, it still requires oversight and compliance efforts. Recent regulatory enforcement actions have caused certain federal regulators, specifically the Federal Deposit Insurance Corporation (FDIC), to consider implementing new rules around FBO accounts. 

With the current regulatory environment of enhanced scrutiny and uncertainty, banks should prepare to ensure any new or enhanced compliance mandates for FBOs are met. For example, proposed rules indicate that FBOs will be audited and need to be more transparent, which will likely require additional compliance resourcing, risk controls, analytical tooling, and firepower.  Any ledger that lacks proper compliance controls will be hard pressed to pass regulatory scrutiny.

FIS, with its industry-leading compliance team, currently supports the FBO model by offering solutions that strengthen risk and compliance controls and address the issues raised in recent regulator actions and guidance.  

Overview of the Side Core Approach

A middle ground exists between on-core scenarios and the FBO model using virtual ledgers: a side core approach. A side core is a secondary core banking system that banks can implement alongside their main core. FIS also supports the side core alternative to the FBO model that speeds time to market and provides a trusted compliance advantage, which may be a better fit for certain banking and fintech use cases.

With less inherent risk than a complex FBO, and a less cumbersome experience than working directly with a main banking core, the side core approach offers an ideal solution for banks and fintechs that accelerates time to market, is highly scalable, and is designed to meet the rigor required to achieve bank-grade compliance.

The side core approach offers a slimmed down, modern bank-grade core that brings all the advantages of flexibility and nimbleness of a virtual ledger while avoiding many of the inherent risks. This innovative approach enables traditional banks to run a more lightweight core alongside their legacy system without disrupting existing banking operations. They can support specific use cases such as instant payment products, digital-only brands, customized bank statements, and other embedded finance solutions. 

Side cores are designed to offer flexibility for innovation by providing an environment to test and launch new products or brands quickly, while maintaining alignment with compliance initiatives. New product launch timelines can be reduced to weeks–not months, and opening new accounts is considerably less expensive, compared to doing the same on the bank’s main core. 

Bank Side Core From Atelio by FIS

Atelio by FIS is an embedded finance platform that enables multiple solutions including an  accelerated time to market with a side core, leveraging the power of FIS’ modern core platform as well as its market-leading compliance capabilities. The platform operates similarly to a main banking system with the advantages of less complexity, modern architecture, faster processing, and fewer constraints than a typical core. 

Key benefits of working with Atelio include: 

• Compliance: Atelio leverages the knowledge base and capabilities of the FIS compliance team. With Atelio, banks and their fintech partners gain decades of experience in developing and maintaining systems designed to comply with regulatory rules, requirements, and expectations.  
• Implementation: Atelio eases implementation and ongoing program management with a single platform that can expose APIs across multiple capabilities, such as onboarding, money movement, charge cards, etc. New programs can be implemented in market within weeks. A fintech working directly with a bank, without the benefit of Atelio, would face the possibility of needing to work across multiple vendors and disparate systems. The Atelio side core model is designed to provide a holistic view across the entire fintech system with the aim of delivering complete control to both the partner banks and fintechs.
• Flexibility: The Atelio system is modular, enabling implementations of only the specific products needed for each use case with capacity to add additional Atelio capabilities over time. Atelio also supports a developer portal which can shorten the time for onboarding, implementation and, ultimately, generating revenue.

Atelio Direct Bank Side Core: A Three-Layered Approach

Atelio products leverage FIS’ modern core, which is one of the few core solutions in the market capable of operating alongside an existing core as a special-purpose side core. This flexibility is crucial for banks seeking to integrate embedded finance capabilities without disrupting their existing systems, making Atelio's offering particularly compelling in this evolving market.

To address the specific needs of banks in building their embedded finance solutions, Atelio has developed a three-layered approach for its Direct Bank Side Core product: the Base Layer, Middle Layer, and Top Layer.

Base Layer

FIS provides a shared cloud instance that can function as a side core, allowing banks to retain their existing core systems. This side core functions as the virtual ledger does in the traditional embedded finance model.

Built upon the robust compliance and regulatory frameworks of FIS's core banking solutions, it also offers the flexibility and scalability to support innovative products, services, and use cases. This allows the Atelio Direct Bank Side Core product to be core agnostic while also being fully integrable with FIS cores or external cores as needed.

This approach is designed to help ensure that Atelio’s embedded finance offerings are versatile, in line with regulatory compliance requirements, and scalable, positioning the bank to lead in the rapidly evolving embedded finance landscape.

Middle Layer

 The Middle Layer of the Atelio Direct Bank Side Core approach is crucial for enabling banks to manage their embedded finance programs effectively. This layer incorporates a suite of off-the-shelf integrations with other FIS and partner ancillary products and provides banks with essential tools for program management, including:

• Account and Ledgering Configurations: Through interfaces, banks can configure accounts and manage ledgering with ease, ensuring seamless integration with their existing systems.
• KYC / AML and Customer Onboarding: The FIS Global KYC product offers robust Know Your Customer (KYC) capabilities, streamlining the customer onboarding process in line with regulatory requirements.
• Risk and Fraud Monitoring: Utilizing FIS fraud tools (such as DDA Fraud Manager), banks can monitor risk and detect fraud more effectively. The fraud management capabilities in this layer are powered by Atelio products integrated into the FIS platform, enhancing security and reducing the risk of fraudulent activities. 

Banks will have the option to enable fit-for-purpose FIS ancillary products for quicker implementation or to leverage their existing program management product suite with additional integrations as needed. This modular approach offers flexibility, allowing banks to tailor their embedded finance solutions to their specific needs while also serving as a distribution channel for FIS ancillary products. 

Top Layer

The Top Layer of Atelio’s Side Core approach wraps the core banking and program management features of the Base and Middle layers into consumable, white-labeled user experiences. Banks will ultimately offer the Top Layer to their fintech partners to facilitate the enablement of embedded finance products in their applications.

The Top Layer includes:

• Access to APIs: Fintechs can access the banks’ embedded finance offerings through APIs, providing them more control of the entire user experience and user interfaces.
• White-labeled widgets and SDKs: Banks can offer a “low code / no code” solution through embeddable, white-labeled widgets. The widgets adhere to regulatory requirements and feature design elements that can be tailored to reflect the fintech’s brand.
• White Labeled App: A fully functioning application that can be configured to reflect the fintech’s brand. This is ideal for those fintechs that do not have sufficient IT staff to build applications.
• Developer Experience: Documentation portals, key management, and related tools to streamline the development process.
• Operational Dashboard: Dashboards to facilitate the fintech partner’s operations, including monitoring of customer onboarding, reconciliation of transactions, related activity, and report generation.

Discover Atelio by FIS Bank Side Core

With the Bank Side Core from Atelio by FIS, banks are able to meet fintechs and their customers where they do business. In the current regulatory environment, compliance matters. Atelio offers side cores that enable flexibility, speed to market, and cost savings, while mitigating compliance risks. This is a unique offering in the industry that provides both banks and their fintech partners with a more seamless way to enter new markets and launch new products faster and at scale.