In June 2021, Ryan Bowen, Unit21’s Head of Sales, hosted a webinar titled, “How Sponsor Banks Ignite the FinTech Revolution.” He was joined by Rodrigo Suarez, Head of Innovation at Piermont Bank, and Brian Fellows, Director of Risk Management and Compliance Officer at NBKC Bank, who are leading the sponsor bank revolution for FinTechs around the world.
Brian manages the risk management function at NBKC, which operates a number of different FinTech programs mainly on the deposit side — checking, savings, debit card programs and the like. Rodrigo runs Piermont Bank’s banking-as-a-service and broader FinTech and innovation banking business. Piermont is a traditional bank that also operates like a startup or a FinTech, bridging the gap between those two worlds.
Their discussion focused on the paradigm shift of banks working with FinTechs, why banks should be considering sponsor models, and what the greatest challenges for sponsor banks are.
In terms of what the market is up to and their perspectives on the paradigm shift from banks to FinTechs, Brian said, “NBKC is a part of the sponsor bank model for deposits, checking, savings, and debit cards. I think the interesting thing in the FinTech space is the rapid acceleration and growth that we've seen.” Banks have an opportunity to help FinTechs launch new products efficiently at speed, and FinTechs can use the bank’s expertise for product development, risk management, and compliance.
Why banks are interested in the sponsor model
In terms of why banks are interested in the sponsor model, Rodrigo stated that “it’s become imperative for them to enter this space. We think about where the industry will go in the next 10-20 years. Banks that are not participating in the banking as a service phase or with a banking as a service type offering may become obsolete. Large and small banks are realizing that the market is trending in that direction, so it's important for them to learn how to work with FinTechs, despite the fact that banks tend to be bureaucratic and move very slowly, while FinTechs want to move fast and operate on lean models.
If banks can find a mutually beneficial way to work with FinTechs, there are a lot of interesting growth opportunities. For example on the deposit side, working with FinTechs, banks can grow and diversify their deposits. They can also drive payment volume and realize benefits on the non-interest income side.
There are benefits on the FinTech side as well and lots of opportunities for growth and profitability. When banks work with FinTechs and their distribution channels, they can serve new and interesting segments that may currently not be served adequately with existing bank products. FinTechs are in a position to help banks meet some of their strategic objectives that they might not be able to meet on their own.
Brian stated, “From the sponsor bank side, there is a level of risk in these types of arrangements. It could be financial risk — can the FinTech support the operations, and on the FinTech side, does the bank have the expertise or the manpower to help the FinTech grow?” There’s also compliance risk that might be fraud or AML-related, and regulatory risk because the FinTech has to work within the parameters of regulations that can often be vague. So both parties need to come into alignment because these relationships could last years.
While in the past, banks might have been in the background in the relationship with the FinTech, this is transitioning because as Brian said, “From a regulatory space, we're seeing a lot of different shifts, different expectations or heightened expectations I would say from the sponsor bank.” He added, “We on the bank side are trying to check some of those boxes as well and make sure that we're continuing to advance forward, and the only way that we can do that is to know what's happening on the ground level at the FinTech.”
Challenges in early-stage FinTechs
There are many challenges in early-stage FinTechs in terms of building the right user experience and having the right go-to-market strategy. As they relate to financial services, those challenges remain but they are compounded by the complexity that a FinTech faces when launching a financial services product, which is highly regulated. Everything needs to be structured in the right way and the bank needs to be able to jump in with expertise in the laws, regulations and operations, and then monitor the relationship as the FinTech is evolving.
As FinTechs begin to get into innovation conversations, what’s next on their roadmap, often the sponsor bank needs to jump in again and provide expertise, direction, commentary and best practices, looking at what is next on the horizon from the FinTech’s viewpoint.
Rodrigo mentioned that “FinTechs can be very different from each other. There may be some that are able to get up and running very quickly, but lean on the bank for certain compliance or legal questions, and then they evolve rapidly from there. But hen there are others that require a lot more support from the bank.”
How sponsor banks help partner FinTechs to mitigate challenges
FinTechs are very unique. They take many shapes and sizes, with unique personalities, products, visions and growth patterns.
Sponsor banks can help FinTechs by providing them with the expertise they need to mitigate risk. And FinTechs need to reach out and ask questions and learn about best practices from the sponsor banks. According to Rodrigo, “By looking at what the FinTech is doing, we have the ability to step in the right time, with the right set of best practices, and with the right feedback to make sure that the FinTech is doing things in a way that makes it easier for them … and for us.”
Balancing the bank’s regulatory oversight needs with the FinTech’s need for innovation
According to Rodrigo, “Our approach has been to build out and design the right set of processes from the start, so that we can operate on the regulatory side efficiently. Of course, we are doing things responsibly and making sure that we address all regulatory requirements so that we can enable FinTechs to innovate in the right way.”
Brian recommends having a good change management program or process, with clear internal lines of communication on what the approval process looks like when it comes to innovation on the FinTech side. Having a good change management program, and a good approval structure makes it much more streamlined on the back end, knowing that large projects and initiatives require a little bit more due diligence or thought process internally than simply changing a workflow or a user interface.
How long does it take to establish a partnership between a FinTech and a sponsor bank?
This can depend on a number of factors, including whether the sponsor bank is already established in the space and has a playbook on how to onboard a new program. It also depends on how unique the program is. There’s a level of expertise if the sponsor bank has worked in the space and has onboarded a similar program in the past. ”It really depends on the FinTech how quickly they want to move and how diverse the product offering is, Brian commented. “I would say, typically, it's probably a three to six-month endeavor from start to finish.”
Rodrigo added that “It really depends on the FinTech and the program. There are a number of things that play into timelines. We have been able on the shorter end of this spectrum to bring FinTechs live in six to eight weeks, which we think is pretty fast. But, again, it can depend a lot on the FinTech’s readiness, the product maturity that they have, and a number of other things.”
Why wouldn’t a sponsor bank be interested in a certain FinTech partnership?
The main reason might be that not all banks are experts in all things, nor can they enable all products or all use cases.
Rodrigo mentioned that “In our case, we’re not focused on doing consumer lending, so if a FinTech is launching a consumer lending product, and looking for the right bank partner to enable that, we're probably not the best option for them. If they're serving a segment or use case that, from a risk perspective, we have not fully assessed, there may not be a mutual fit there either. These obstacles aside, I think there are ways for a bank to partner with a FinTech that has the right level of maturity, alignment on product, alignment on use case, and segment. But that's not always there.”
How FinTechs build trust with partner banks in terms of data privacy, data security and the use of AI
Often the proof is in the pudding. Data privacy and security are always top of mind and, with AI, it depends on the use case. For example, is AI being used for a cashback rewards program or for consumer underwriting? Banks have a due diligence period even before they sign a contract and ongoing reviews as well. It comes down to the level of transparency — if you have a lot of transparency, there won’t be any issue from a trust standpoint.
The partnership thrives if there is transparency, honesty and exchange of information from the get-go that is ongoing.
How banks monitor updates as they scale, adding additional FinTechs
Rodrigo answered that you need to have the right processes from the start. Without them, it becomes harder to keep up with that volume. And you also have to build the right team to support that scale and to support more FinTech relationships. You can’t have one without the other.
Certain things that are straightforward, like making sure the right disclosures are there or making sure the right language is in the FinTech’s Terms of Service can be done relatively quickly. Other things may require more attention and could take more time to approve or feel comfortable with. These can be done quickly if you have the right process to support it from the start and then build the right team to keep doing that efficiently.
Brian added that “A single point of contact will make your life a lot easier managing some of those changes, particularly in documents like Terms and Conditions, disclosures or anything that's consumer-facing for that matter.”
Automation in the future to remove friction and deliver processes without a team?
Brian mentioned that he sees automation around product simplification. There could be new technology that a bank might adopt to simplify processes. Rodrigo concurred but feels that “Other things will always require human judgment and a person looking at something, providing input and making sure that things are done the right way. But I think a bank that's doing this should always strive to simplify processes and make things easier for the FinTechs that it works with.”
Key takeaways from Brian and Rodrigo
For sponsor banks, don’t be afraid to get into this space. Understand the risks, have conversations with regulators and with peers. You can get a lot of good information from your peers and network. So don't be afraid to reach out to other banks who are already doing it with questions or to learn what the risks are. For FinTechs, find ways to reach out to banks to assess what's the right approach and what's the right model to launch a new product. If you’re already established, reach out too if you’re expanding into financial services because you need to find the right bank and the right overall model to do that.