An interview with Walletto’s chief executive officer, Romans Baranovs. UAB Walletto is a rapidly growing Lithuanian electronic money institution, regulated by the Bank of Lithuania. It is an issuer and acquirer of Visa and Mastercard, providing SEPA and SWIFT payments for international business customers.
Over the past six years, Walletto has embarked on a long and carefully executed strategy to collaborate with Visa and Mastercard in becoming principal members, thus allowing Walletto to provide e-commerce acquiring, card issuing, and payment services to its customers. Becoming a principal member is not a process that can be undertaken lightly. Walletto invested a huge amount of resources and time in that process, and getting to this stage has been a massive achievement.
Take note that Walletto stands out among its market peers as a principal member of both Visa and Mastercard as issuer and an acquirer. Its extensive portfolio of services is a rarity in itself. However, our focus today is on a specific facet of Walletto’s operations: card issuing.
This is the first in a series of articles devoted to the development of various Walletto services.
Partnering and collaborating to build innovative payment solutions
Interviewer: Today, we’re delighted to have Romans Baranovs with us, serving as the CEO of Walletto, a dynamic fintech startup hailing from Lithuania. Walletto not only provides a range of services directly to clients but also offers tailored solutions for fellow startups to quickly launch “in the box”. Thank you for joining us, Romans. Please tell us more.
Interviewer: We would love to know how Walletto began. Tell us a bit more about the early days.
Romans: Walletto started in 2017: we created a business plan and strategy built around firstly obtaining an electronic money license in Lithuania and then obtaining Visa and Mastercard licenses for card issuing, e-commerce acquiring, and payments. Most new banks focus on the retail market, but our target was to create a Сo-brand/BIN sponsorship business model to provide potential partners with a convenient way to issue cards for their customers without a specific issuing license. It was the main idea with which we first approached the Bank of Lithuania. Several meetings followed where we fine-tuned our business plan and set ourselves clear strategic goals—a road map of where we wanted to go and how we would get there.
Interviewer: Preparing a start-up financial institution is a big undertaking. Can you walk us through some of the steps you had to take in this initial phase?
Romans: It took us about a year to reach our initial goal—and a lot of hard work, too, but I will skip the more boring details about the policies, procedures, and documentation chasing that were involved. By March 29, 2018, we had successfully applied for and gotten an electronic money institution license, with passporting to the EU.
At about the same time, we submitted our application to the Euro Payment Council, and that meant that we became a direct participant in the STEP2 system and enabled SEPA payments through the Centrolink system. We then submitted our application to Visa and Mastercard to obtain a license and became principal members of both.
Interviewer: So how did you become a card issuer with Visa and Mastercard?
Romans: The requirements are pretty tough. I will walk you through the key steps that we had to take. We had to have an established operational office and a business plan that was focused on issuing. We needed to employ key staff in finance, sales, AML, IT, security, etcetera. We then had to pass an independent AML audit. Each of these was a complex step in itself, and as you can imagine, all these steps came at a cost too.
Interviewer: What other challenges did Walletto face when completing this process?
Romans: There were lots of other challenges that we addressed at the same time in order to create the services we needed to become operational. These included finding and implementing remote KYC provisions that complied with the Bank of Lithuania’s requirements. We also needed to create an IT infrastructure that was compliant with PCI DSS and PSD2. Then there was more complex technical integration with Visa’s and Mastercard services, the implementation of Walletto’s core banking system, and the development of flexible APIs for our future co-brand and BIN sponsorship partners. A big part of what we did relied on the selection and implementation of reputable and reliable systems, for example, AML screening and monitoring and our chief accounting system. We also had to make connections, establish integration with card manufacturers, and find card delivery services that were most suited to our customers.
Interviewer: How did you finance operations at the beginning, and how long did it take for you to become operational?
Romans: I nearly forgot to mention that. It was a massive financial undertaking, and from the start, it required an enormous amount of investment from our shareholder.
However, once Visa and Mastercard were satisfied that we had met all their requirements—the requested documentation, the audit reports, the collateral, the business plan—we got licenses for Visa and Mastercard card issuing that allowed us to get to work, starting with onboarding our first co-brand partner.
I would just like to emphasize at this point that a lot of effort, time, and money are needed to invest in entering the issuing business. I mention this for the benefit of both financial and non-financial institutions that have an interest in collaborating with Walletto and also Visa and Mastercard.
Interviewer: What is the idea behind the Co-brand/BIN sponsorship business model provided by Walletto? In fact, can you explain the idea of Co-brand/BIN sponsorship?
Romans: There is a lot of confusion about Co-brand and BIN sponsorship, so it’s worth taking a moment to go into the details. I have visited many exhibitions and fintech events and met with many potential business partners, and it is sadly true that there is a lot of misunderstanding and a general lack of clarity about co-brand and BIN sponsorship programs. These programs don’t get a lot of press. I rarely come across a potential Walletto partner who tells me that they already know about how BIN sponsor programs work, yet many are still telling me, “I want my own BIN”. When I am talking to potential customers during exhibitions, I find the hardest part of my work to be helping them understand what the BIN sponsorship means and the benefits that collaboration with each member can bring them.
I will explain what Co-brand and BIN sponsorship programs are and why it’s much better for a business to find a partner to work with rather than attempt to become a principal member of Visa and Mastercard.
In short, being in a Сo-brand/BIN sponsorship program means that the BIN (Bank Identification Number) still belongs to the principal member, like Walletto, but is dedicated to a particular partner; in other words, nobody else can use the BIN (or, in some cases, the BIN range). This ensures a clear picture of the partner’s transactions, more convenient accounting, separate fraud monitoring, etc. The partner decides by themselves on their card design and branding the card with their logo from both card sides, so the card issued by the partner looks and works just like any other bank card but bears the partner’s branding and name.
Walletto communicates with Visa and Mastercard, a program request management tool that helps to explain the partner’s business model, money flow, AML/KYC processes, and many other topics. Walletto is there to explain the whole process and answer any questions the customer may have. Once the program request management team has accepted the partner onto the program, the partner is ready to go live from Visa and Mastercard’s point of view.
Meanwhile, the BIN still belongs to Walletto, therefore allowing Walletto to take on the burden of responsibility. From the partner’s perspective, they are not exposed to any additional requirements, agreements, or liabilities, including collateral, from Visa and Mastercard, as Walletto looks after these.
Unlike other companies, the great thing about working with Walletto is that you, as a partner, get access to the benefits of both Visa and Mastercard. This gives our partners a real advantage and a head start on the competition.
Interviewer: You have summarized how the program works very clearly. Why do you think the benefits of a partnership are not very well known?
Romans: It is a very underexposed business model; it just hasn’t had enough visibility in wider business circles. And part of that is the need for a better understanding of the benefits and protection that can be provided by working in collaboration with a provider program rather than a business trying to independently obtain direct participation in Visa or Mastercard.
You might have a good idea and a great business plan, but they don’t guarantee your success in becoming a principal member of Visa and Mastercard. It is something that looks perfect on paper, but in reality, it could turn out quite differently. For instance, you might have the expectation of issuing, say, a million cards, but in a real-life scenario, you might find that it is an unreachable target. And by that time, you will have already gone a long way along the route of obtaining licenses and put a lot of investment into your infrastructure, staff salaries, systems, office space, etc. Then finally, you might realize that you need to change your approach, but by that time, the investments are exhausted and the company has collapsed. It is a sad scenario, but there is a good thing: this one can be avoided by choosing the Co-brand/BIN sponsorship program approach that Walletto provides.
Interviewer: Who do you think are the most likely businesses to benefit from the partnership program that you offer?
Romans: I would say there are two types of customers most likely to benefit from a partnership with us: firstly, newcomers who might have just obtained a financial license (or possibly even those who haven’t yet) but who do not feel strong enough to start issuing on their own. Secondly, established financial and credit institutions that are currently principal members of Visa and Mastercard These have probably already issued a large number of cards and are thinking about how to not pay enormous fees for the maintenance of their licenses.
Also, I would like to mention that every company with a large customer base can issue Co-branded cards in cooperation with Walletto to provide additional benefits to customers for loyalty and brand awareness-raising, but regarding this case, we will speak separately.
Interviewer: Can you go into a little more detail for each of these scenarios?
Romans: Happily. To begin with, let’s look at newcomers.
Here is an example: a company has just gotten its financial license and is now considering expanding its financial services by issuing Visa or Mastercard cards. There are two options for this company. The first is, as I described above, where there is a deep investment in time and money and the object is to obtain licensing directly. There is the accompanying risk of failure if expectations cannot be met. The second option is where the company could collaborate with us in a Co-brand/BIN sponsorship program; Walletto then undertakes the majority of the work, thus relieving the company of the burden of trying to become a principal member of Visa and Mastercard.
Instead of the company spending its investment on regulatory and scheme requirements, it can partner with Walletto and then put funding into market development, creating a convenient and user-friendly interface, mobile application, CRM, and all the other important services that would increase customer confidence and adoption. Capital could be properly invested in the creation of a healthy banking service while Walletto looks after all the related processes in the background. Because we have created a sound legal and technical base model, we are very comfortable offering partners our services this way.
Interviewer: Do you feel that your decision not to enter the retail business and remain in the B2B sector, even in the background, has paid off?
Romans: Yes, absolutely. We never saw ourselves in retail business like a neo-bank, and that is why we put a lot of time into working on compliance, AML, and IT parts to create flexible APIs that can be used by other players on the market.
For the customer, as a newcomer, the benefit of collaborating with us is that we can stand behind your business, allowing it to flourish. Once you are confident in your ideas and satisfied that your business plan works, if you then wish to try issuing directly, you can start communicating with Visa or Mastercard about obtaining a license and submitting the necessary applications, etc. With us on board, you will have the security of knowing that your business is already up and running and that you have a continuous income stream that gives you the flexibility to consider your future options.
Interviewer: You mentioned existing issuers as well as newcomers. What kind of existing issuers do you think would benefit from a partnership with you?
Romans: The existing issuers that I think would get the most benefit from a partnership are small to medium-sized banks or other financial institutions. These probably already have a few issued cards and a principal license from Visa and Mastercard.
Interviewer: What would you say are the advantages for these existing issuers?
Romans: The major streams of income that allow SME financial and banking institutions to thrive are customer deposits, customer loans or credit agreements, and, in some cases, treasury activities such as bond trading that are provided to customers. In addition, some companies also offer either health and travel insurance linked to issued cards or other minor benefits associated with gold, platinum, and other reputable cards.
If you look at these services, all of them have little or nothing to do with card issuing as it stands. The first three services are clear-cut; the insurance and other benefits are additional services that do not rely on principal membership. So effectively, card issuing is a loss that must be covered by the provision of other services.
Of course, I am not talking about big banks with mass issuing; this is about banks with a small or moderate customer base. But these smaller banks are usually focused on specialized services and feel comfortable within their niche. For them, card issuing is more about brand and reputation and doesn’t bring in additional income. As mentioned, it usually means a loss.
Regardless of the volume of issued cards or transactions, Visa/Mastercard and the processor have monthly, quarterly, and annual fees, and it is common for smaller banks to be unable to break even on issuing cards. So instead of increasing their profitability, card issuing forces these banks to cover losses created by fees.
Another side to that is that these banks cannot stop issuing cards because it is part of their business; they are not providing a full range of services without this function.
Interviewer: No business likes to make a loss on part of its operations. Is there a way around that scenario, and more specifically, what steps are needed to make a profitable change?
Romans: That is where we can help with our BIN sponsorship program. When we partner with a bank or financial institution, we ascertain their particular needs—for instance, if they need a specific BIN or multiple BINs—and then these are either ordered or migrated to Walletto. Depending on the bank’s preferences, we can provide our API for integration with its systems, or if it is already integrated with the same processor as Walletto (or would like to have direct integration with the same processor), no further integration with Walletto is required. Walletto takes on the ordered or migrated BINs, starts paying the Visa or Mastercard/processor fees, and frees the bank from unnecessary expenses, allowing it to concentrate on its unique and specific services. Walletto starts performing the card issuing in the background.
Interviewer: It sounds fantastic, but is this model realistic?
Romans: It is realistic, and implementing it is actually much easier than you’d imagine. At this moment, Walletto is in discussion with a number of small banks in Lithuania, and we expect them to start this operating process very soon.
Interviewer: Thank you for telling us about Walletto’s journey and explaining the services you offer. Would you quickly summarize what you have told us in a few lines?
Romans: I will summarize the benefits for you: The Co-brand/BIN sponsorship program model brings cost and time efficiency to small and medium-sized financial organizations. There is no requirement for putting collateral into Visa or Mastercard. You do not have to find a KYC provider, as Walletto does this all for you. You do not have to have complex and costly integration issues. You may be able to reduce your IT infrastructure. All Visa and Mastercard services are ready to go, including Apple Pay and Google Pay. You don’t have to source card manufacturing or delivery services, and you can always expect fair, transparent, and flexible pricing from Walletto.