Bank-fintech partnerships are serious business

Clayton J. Mitchell, Morgan Strobel
12/7/2022
Bank-fintech partnerships are serious business.

The fruits of bank-fintech partnerships are best enjoyed when parties are aligned on outcomes and committed to creating value for their customers.

Bank-fintech partnerships are no longer novel, and financial services organizations and regulatory parties are still learning as partnerships play out.

Regulatory guidance, including interagency guidance issued in September 2021, is setting more expectations for how bank-fintech partnerships should be carried out. But while compliance with guidance is structurally supportive, it is not the only key to successful business relationships.

Is your company a fintech?
See how Crowe consultants can help you address a variety of unique needs. 

A framework for growing bank-fintech partnerships

An effective bank-fintech partnership framework aligns objectives, establishes trust, and enforces transparency between the two parties. The following framework, built on three core principles, is a good place to start.

Enablement

  • Confirm alignment and synergy of business capabilities
  • Prioritize negotiations regarding hazards, threats, unshared risks, data sharing, and reporting expectations
Enablement
Execution

Execution

  • Focus on providing end-customer value and fair, responsible offerings
  • Make incremental investments in risk management and compliance as the bank-fintech partnership deepens

Monitoring

  • Perform initial due diligence to understand opportunities and risk
  • Maintain ongoing monitoring, including enhanced monitoring based on triggering events
Monitoring

Move beyond seeing partnerships as a means to an end

It can be tempting to focus only on the immediate and most appealing aspects of a bank-fintech partnership. But if parties dive in without alignment on outcomes or due diligence, they could encounter complications that ultimately erode the satisfaction and trust of their most important asset: customers.

Here are some strategies both banks and fintechs can employ when pursuing a partner or sponsor bank.

1. Understand that the whole bank-fintech partnership is greater than its parts 

Understand that the whole bank-fintech partnership is greater than its parts - Fill important gaps by forging a partnership

The foundational benefits of many bank-fintech partnerships are largely accepted. Banks have access to payment systems, capital, trust, and infrastructure. Fintechs have focused offerings, enabling technology, and distribution channels that customers increasingly expect from their financial transactions. Fintech services can also open banks to new avenues of customer insight.

Banks and fintechs can fill important gaps by forging a partnership, but this is not a simple plug-and-play scenario. The benefits of working with a bank or fintech come with that company’s attached culture, expectations, and goals. How well these factors align with each other can cause friction or amplify worth to customers.

2. Gauge strategic alignment with a potential partner

Just like with personal relationships, taking time to identify and confirm the right bank or fintech partner can prevent problems down the line.

Organizations should not assume that a potential partner has similar qualities in mind. Performing appropriate due diligence can answer important questions, including:

  • Do overarching values and business strategies align?
  • Are customer bases coordinated?
  • How much data and information are parties willing to share?
  • What reporting is expected in terms of content, accuracy, timeliness, and transparency?
  • Are core systems and technologies compatible?
  • Can systems efficiently and productively integrate?
  • How will the bank share risk management activities, knowing it is the accountable party?
  • How might combined short- and long-term goals benefit customers?

In past cases, many banks handed more control to fintechs (for example, customer relationship management and complaints handling) to reap initial growth and technological benefits more quickly. However, evolving regulations are changing the playing field. Banks and fintechs that take the time to meet as equals and choose the right partner could benefit more in the long run than those who rush.

3. Consider third-party risks embedded in the bank-fintech partnership

Consider third-party risks embedded in the bank-fintech partnership

A third-party misstep can damage a financial services company’s reputation. Typically, banks are on the regulatory hook regardless of contractual obligations. The financial consequences tend to be more determined by the contract.

Naturally, it’s more proactive to assess and discuss who should be responsible for preventing problems from developing. Of highest importance: Will a partner be able to protect customer data and take reasonable steps to prevent security breaches?

Additional matters are important to consider as well, depending on the nature of the partnership and services provided. Common areas of concern include:

  • Anti-money laundering. Partner failures related to anti-money laundering practices or consumer compliance can pose significant risk.
  • Fourth-party risk. A fintech or bank’s engagement with other third parties – fourth parties from the perspective of the partner – can introduce risk to both.
  • Business resiliency and financial viability. The collapse of one partner could place tremendous strain on the other.
  • Consumer protection. Proper controls for fair and responsible banking practices need to be centralized and aligned with consumer protection laws, regulations, and guidance.

4. Keep boards of directors and other governance committees in the loop on risk

Management teams are responsible for exploring new products and initiatives. However, given the level of access to customers, strategic insights, and data inherent in many partnerships, they should also have the attention of the boards and other critical governance committees.

Each governing body should challenge whether the strategies of partner organizations align with their own company’s strategy. Any risks should exist within the defined risk tolerance of the organization.

Best practices for managing risk in a bank-fintech partnership include ongoing monitoring of any type of trigger event that might cause a change in risk profile. Such triggers can include operational failures, litigation, data breach, regulatory concerns, complaints, and imminent threats to the company’s financial viability or reputation. The board should receive monitoring updates regularly.

5. Evaluate the true cost of the bank-fintech partnership

Evaluate the true cost of the bank-fintech partnership - Consider the total costs of external factors and oversight

Bank-fintech relationships are achieved through joint ventures and other forms of partially or fully owned affiliates. Both parties should consider the total costs of external factors and oversight in their evaluations.

Organizations also can calculate the total cost of the relationship and all internal resources required, including:

  • Training or hiring personnel
  • Negotiating contracts
  • Implementing shared technology
  • Due diligence
  • Ongoing monitoring
  • Increased operational burden
  • Enhancing risk management practices
  • Periodic reviews

Forge a two-way partnership that keeps customers delighted and protected

Regulations and technologies change, but all routes lead to customers. Both parties should have compatible commitments to meet their customers' expectations for the best chance of success.

Similarly, any opportunities and points of contention faced in a bank-fintech partnership can trickle down to customers. A healthy bank-fintech relationship built on trust, transparency, and aligned strategies can support increased benefits and faster innovations. Existing customers can have more incentive to stay and potential new customers can be confident amid change.

Learn more about the fintech side of approaching compliance and bank partnerships.

Looking for help finding the right bank-fintech partnership?

Our third-party risk management and fintech consultants can help organizations develop and strengthen systems for reporting, transparency, and risk management.
Clayton J. Mitchell
Clayton J. Mitchell
Managing Principal, Fintech
Morgan Strobel
Morgan Strobel
Financial Services Consulting