Call it the banking speech heard around the fintech world. Acting Comptroller of the Currency Michael Hsu’s September 7th speech at the TCH + BPI Annual Conference—and his commentary regarding the potential systemic risks under-regulated fintechs place on the U.S. financial system—reverberated across the bank and tech world. The cause and effect of his language is consequential, but how did we get here?
Bank-Fintech Partnerships of Today Are Highly Diverse
The modern fintech-bank partnership model has its origins in the prepaid card industry. Accelerating in the early 2000s, prepaid card program managers—today many of them leading fintech startups in their own regard—partnered with established financial institutions (FIs) and leveraged their banking charters for both depository purposes and to garner card network approvals to issue prepaid cards—single use and reloadable—across any and every industry.
The several primary banks that operated in this space in the 2000s, often called “sponsor banks” or “BIN sponsors,” such as MetaBank (now Pathward), The Bancorp Bank, and Green Dot, shifted with the proliferation of digital banking in the early 2010s, adjusting to support programs offered by more contemporary fintech companies such as Chime, Robinhood, PayPal, and PayPal’s subsidiary Venmo.
These primary banks, which also include the likes of Stride Bank, Axos Bank, Sutton Bank, and Central Payments, continue to play an oversized role in modern bank-fintech partnerships, but with significantly more competition.
The bank sponsor model is replicable, despite there being many moving parts and considerations. As a result, dozens of much smaller, nimbler FIs have managed to build and convince fintech companies to launch on their models. The selling points can vary widely, but selection drivers generally include lower costs compared to incumbent sponsor banks, greater profit sharing, simplified or quicker implementations, and less stringent compliance requirements or oversight—the latter of which is attracting scrutiny.
Creating an Optimal Fintech Partnership
Around the same time as Mr. Hsu’s speech, the Office of the Comptroller of the Currency (OCC) announced a consent order against one smaller sponsor bank, Blue Ridge Bank, for “unsafe/unsound practices” in its AML program. Given the quick proliferation of these FIs and the Acting Comptroller’s speech, we can expect more announcements against other FIs.
But while some fintech organizations would prefer to avoid the middleman, the next obvious choice is not always the wisest, either.
Many fintech startups have considered or even publicly announced intentions to attain their own banking charter—often at the helm of “controlling their own destiny,” cutting costs, simplifying processes, or even to legitimize their business among U.S. consumers. But acquiring a banking charter is no easy feat. Long gone are the days of humble bank origins where a local community or a group of businesspeople can come together and open a thrift or a state-chartered bank quickly without federal oversight.
Instead, today’s bank chartering process is difficult to navigate, expensive, and lengthy. Among modern challenger banks, such as SoFi and Varo Bank, that have gone through the process, Varo Bank alone spent three years and US$100 million to acquire a charter—certainly not pocket change.
That leaves the bank-fintech partnership route the most obvious choice for fintech companies. But as more chartered FIs consider fintech partnerships, here are four basic tenets to follow, post-speech:
- Identify the risks: What type of fintech program will your FI be sponsoring? What rules or regulations impact that program, and does your FI have the resources to appropriately manage all risks associated with that program—including BSA/AML, OFAC, Reg E, Reg Z, etc. as applicable?
- Tell your regulators, internal and external: Communicating new programs and fintech partnerships to internal and external stakeholders is integral. Give compliance a seat at the table, and communicate to regulators any significant changes to your business via the appropriate communication channels.
- Onboard adequately: Ensure all compliance and regulatory components are implemented in conjunction with launching. Compliance pieces should work harmoniously with the rest of the program—manual processes, such as those for conducting customer identification (KYC/CIP) for example, leave room for error.
- Track, assess, and manage: Continue overseeing fintech programs, conducting regular audits, performing quality assurance, and testing the various components that make up the fintech program. Make a plan and stick to it for items requiring remediation; fix and report issues—and don’t be afraid to pull the plug on a bad program.
As the OCC and other regulators home in on fintech startups and their sponsor banks, it is hard to ignore the benefit of having certain fintech companies directly regulated, but this is the obvious path much less traveled by—largely by regulators’ and our financial system’s own doing.
Have any questions about partnering with fintech companies or FIs or about understanding BIN sponsorship requirements? Contact me at [email protected].