The stats clearly demonstrate the rapid adoption of bank-fintech partnerships in the financial services industry over the last few years.
How Many Banks Partner with Fintechs?
While banks frequently viewed fintechs as a threat in the early days, many of them today are finding that bank-fintech partnerships actually help them flourish.
For fintechs, partnering with banks represents a promising opportunity to build mutually beneficial cooperation, expand their geographical presence, and mitigate the compliance burden.
According to a 2019 PWC survey, 42% of banks engaged in joint bank-fintech partnerships, a figure that more than doubled to 94% of financial services companies expressing confidence that fintechs would help grow their company’s revenue over the coming years.
This analysis was written by subject-matter experts with decades of experience, not hired copywriters, SEO agency, or AI-based tools. We are regulatory fintech compliance experts.
Why Should Banks and Fintechs Partner?
The fintech industry has brought ever greater competitive challenges and disruption for banks, particularly community banks. Fintechs often offer better services when it comes to online banking services. At the same time, community banks have relationship experience and compliance know-how that can bring benefits in partnership with fintechs building innovative financial solutions.
The digital economy has increased customer expectations, and banks of all sizes across the globe are reacting by automating their processes. Banks are also shifting their customer acquisition and retention strategies from expanding their branch system to creating technically sophisticated services such as mobile banking.
Community Bank-Fintech Partnerships
In this context, it comes as no surprise that regulatory bodies have shown more interest in the role that innovation plays in the financial sector. Therefore, they are closely considering compliance and due diligence requirements in bank-fintech partnerships.
This interest culminated in new guidelines jointly released in August 2021 by the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “Agencies”), intended to help community banks conduct due diligence on fintech companies.
While the Guide specifically addresses “community banks”— defined as banks with $10 billion or less in consolidated assets supervised by one of the Agencies — the Agencies note that the fundamental concepts of the Guide may be useful for banks of varying sizes.
The Guide also applies to other types of third-party relationships as a source of due diligence best practices and as a preview of potential areas of future regulatory focus.
Overall, the guidelines provide a structured approach to due diligence for community banks. They offer especially useful guidance for banks with minimal prior experience partnering with fintechs. Moreover, fintech companies may also find the guidance useful in preparing for discussions with potential bank partners.
The Guide to Community Bank Due Diligence Focus Area
The due diligence for community banks should focus on these six areas:
- Business experience and qualifications. Operational history, experience, legal and regulatory actions, and strategic plans.
- Financial condition. Financial analysis of fintech's ability to remain as a viable business operation and market considerations.
- Information security. InfoSec framework, including documented and enforced data security controls, incident response, breach notification processes, and information systems programs and design.
- Legal and regulatory compliance. Organizational documents, licenses, registrations, legal permissibility of activities and products, regulatory compliance policies, marketing channels, and consumer complaints.
- Operational resilience. Business continuity planning, business resilience and incident response, and service level agreements.
- Risk management and controls. Effectiveness of risk policies, procedures, process, training, reporting, and general ability to align with the bank’s risk appetite, appropriate laws, and regulations.
These guidelines reflect the recognition that bank-fintech partnerships can be meaningful and beneficial in a number of operational areas and product types.
What are the meaningful and beneficial areas of bank and fintech partnerships?
- digital and mobile payments and deposits
- customer interface and experience technology
- provision of money management and wealth management
- expedited credit underwriting and loan origination processes
- data breach and identity protection tools.
In turn, fintech companies can benefit greatly from the substantial pre-existing customer bases, market presence, and reputation of banks of all sizes.
What Are the Bank Fintech Partnership Models
Based on the scope of the relationship bank-fintech partnerships typically fall into one or more of the following categories:
- Referral partnership model
- Fintech as a vendor
- Private-label / White-label
- Hybrid model
Let’s look at what each model means:
Referral Partnership Model
The least direct relationship is a referral partnership. In this model, banks refer customers to a preferred fintech to supplement features the bank does not offer.
Fintech as a Vendor Model
In a more direct relationship, the fintech acts as a technology provider to deliver specific functions, specifically as a vendor.
Private Label / White Label
Similarly, a bank can choose to offer a fintech’s capabilities under a “private label” or “white label.” Such labeling typically involves banks creating their own products and services under their own brand or customizing a fintech product to remain invisible to the bank’s customers.
Hybrid Bank-Fintech Partnership Model
More recently, “hybrid” models have also become common in the industry, such as direct investment or acquisition, outsourcing services, or allowing the fintech to work with the bank to offer services such as lending and account issuance.
In each case, these partnerships create mutual responsibilities for ongoing operations, including compliance. It is important for both partners to carry out careful due diligence to ensure the right fit and ability to deliver.
What Are Bank-Fintech Partnerships Examples?
We would like to mention these five important recent examples of bank-fintech partnerships as of 2023:
- Tradeshift & HSBC
- Stripe & Goldman Sachs
- Revolut & Cross River Bank
- N26 & Wise
- Citi and IntraFi
Let’s look into these noteworthy bank-fintech partnerships that illustrate the huge benefits that could arise out of such collaborations.
Tradeshift & HSBC
Tradeshift, known as one of the world’s largest business commerce platforms, joined forces with HSBC to develop a simple digital platform. The platform enables businesses to manage their global supply chains and working capital requirements from any device. This successful partnership not only generates significant revenues for both parties, but also simplifies international trade processes.
Stripe & Goldman Sachs
Stripe is a well-known US fintech company facilitating payments for businesses by partnering with many major banks. For example, its banking-as-a-service API (i.e. Stripe Treasury) runs through its partnerships with Goldman Sachs and Evolve Bank & Trust.
Revolut & Cross River Bank
In April 2022, Cross River Bank entered into a partnership with British-Lithuanian neobank Revolut to deliver more affordable access to credit for US Revolut consumers. The partnership will open up the first US-based consumer personal loans for Revolut customers thanks to Cross River’s technology infrastructure
N26 & Wise
N26 is a German neobank headquartered in Berlin. N26 partnered with Wise, the global technology leader in international payments, to offer international money transfers in over 30 currencies.
This valuable partnership builds on a joint vision to disrupt the financial sector by making international money transfers easier and more transparent.
Citi and IntraFi
In 2022, Citi launched a new US deposit sweep solution through its partnership with IntraFi, known as the IntraFi Yankee Sweep. This product allows institutional clients with US accounts to sweep cash into demand deposit accounts at participating US branches of non-US banks.
What Are the Factors Driving a Greater Bank-Fintech Collaboration?
Five factors are driving further industry change and creating even greater need for bank-fintech partnerships:
- Mobile Adoption
- Remote Work
- Evolution of Community Banks
- Industry Collaboration
- Regulatory Modernization
We reviewed each bank-fintech collaboration factor in detail below.
The rapid adoption of consumer technology like smartphones and smartwatches has created vastly different customer needs over the past few years. And, as the adoption rate for these devices increases, the need for immediate one-to-one access to financial services has increased as well.
As a result, banks and credit unions should look to fintech as a means to provide more services, much like the industry has done in the past.
A radical digital transformation took place across industries during the COVID-19 pandemic, as the shift to remote work created more opportunities to develop new products. This pivot uncovered challenges and pain points that likely would not have been assessed and resolved if not for the pandemic.
In fact, 88% of middle-market businesses, including banks, implemented new technologies within the last year.
Evolution of Community Banks
At a time when the four biggest commercial banks in the US controlled 36% of the industry (2018), digitization enabled community banks to remain independent.
For example, technology can improve decision-making by reducing the amount of time it takes to approve a loan while mitigating risk. Technology can help community banks process more loans, thereby increasing revenues while also reducing the time and cost of processing paperwork.
How far is this collaboration trend going? PwC sees 82% of current financial service providers increasing partnerships within the next five years.
Competition between banks and new entrants may give way to direct collaboration across the fintech ecosystem, which should enable both parties to profit. Potential opportunities span from product design and development by start-ups to distribution and infrastructure capabilities by banks.
With this backdrop, it is fair to predict that in the coming years, the US government will continue to mature its regulatory approach, and indeed the OCC is already taking steps related to fintech. In a statement before the Federal Reserve Bank of Philadelphia’s Fifth Annual Fintech Conference in November 2021, Acting Comptroller Michael J. Hsu discussed modernizing the financial regulatory perimeter.
Hsu said: “Modernizing the bank regulatory perimeter cannot be accomplished by simply defining the activities that constitute ‘doing banking,’ but will also likely require determining what is acceptable in a bank-fintech relationship.” It is likely that with regulators thinking more and more about bank fintech partnerships, the US will follow existing trends elsewhere in the world.
Conclusion: Staying Ahead of Evolving Regulation Impacting the Future Model of Bank-Fintech Partnerships
Given the continuous evolution of the financial technology landscape, a bank’s access to and understanding of fintech will be critical to effectively meet the needs of its customer base. With appropriate risk management and compliance guardrails, bank-fintech partnerships present a notable opportunity for community banks to strengthen existing operations, particularly when the partnership serves the unique strategic objectives of both parties.
What is certain is that bank-fintech partnerships will continue to be a driver of innovation in the coming years as both sides strive to grow and engage their customer base to drive more revenue.
As we remain in a fast-moving space where guidance from industry and regulatory experts continue to inform and mold the business model, InnReg is well-positioned to provide support. If you have questions about your compliance requirements and preparation while regulation is still developing, we’re here to support you with practical guidance on compliance and risk considerations related to bank-fintech partnerships. As an outsourced compliance provider, we can help you with:
- KYC, AML, and Customer Due Diligence
- Suspicious Activity Reporting
- Fraud prevention
- Red flag programs
- Information security and data protection
- Marketing and advertising compliance
- Compliance governance and risk assessment
- Staff compliance and training