Banking on Partnerships

The Evolving Relationship Between Banks and Fintechs

The relationship between banks and fintech companies has transformed significantly in recent years. Once viewed as disruptors, fintech firms are now seen as valuable partners in helping financial institutions reach their strategic objectives, whether related to customer experience or directly to the bottom line. During this period, regulatory scrutiny of bank fintech partnerships intensified and became a thematic supervisory focus area. As the financial industry continues to evolve, understanding the dynamics of these partnerships is crucial for both banks and fintech firms— especially from a regulatory perspective. 

A Shift from Client-Vendor to True Partnerships

In the past, many bank-fintech collaborations have resembled client-vendor relationships. This is changing. Bank-fintech partnerships are emerging as successful partnerships with a shared vision and commitment from both parties. They are hallmarked by shared risk and reward profiles, integrated technology solutions, and aligned performance metrics. This shift helps unlock the full potential of these partnerships by accelerating time to market, developing cutting-edge financial products, and increasing agility.

An example: HSBC recently partnered with Tradeshift, a leading business commerce platform, to create a solution that enables businesses to manage their working capital and global supply chains more effectively. This collaboration allows companies to digitize and automate their operations, enhancing efficiency and visibility while improving risk management. The partnership illustrates how banks can leverage fintech capabilities to offer comprehensive solutions to corporate clients.

Navigating Challenges Together

Despite the potential benefits, many bank-fintech partnerships face significant challenges. To navigate these challenges, both banks and fintech must prioritize open dialogue and transparency. Building trust is foundational, and it begins with both parties being upfront about their expectations, limitations, and goals. Regular and structured communication channels can help address issues promptly, ensuring that both parties are always on the same page.

Establishing a clear framework for collaboration contributes significantly to the success of these partnerships. This includes defining roles and responsibilities, setting measurable goals, and maintaining regular check-ins to assess progress. A well-structured partnership framework ensures that everyone involved understands their specific duties and how their contributions fit into the larger picture. Moreover, continuous feedback loops and regular performance reviews can provide both parties with the insights needed to refine their approaches and strategies.

Recent events involving Synapse and Evolve Bank & Trust have highlighted the critical importance of oversight in these partnerships. Synapse, a banking-as-a-service fintech service provider recently filed for bankruptcy, impacting banking and fintech relationships and also placing access to customer deposits at risk. As a direct consequence, Evolve Bank & Trust, which partnered with Synapse, was the subject of Federal Reserve enforcement action arising from poor risk and compliance oversight of the partnership. These incidents serve as a stark reminder that effective governance and risk assessment are essential components of successful bank-fintech collaborations. Such events underscore the need for both parties to establish clear frameworks for collaboration that prioritize compliance and mutual accountability.

Regulatory Considerations

Both parties must adhere to relevant regulations, particularly concerning anti-money laundering, data privacy, and consumer protection, and while fintechs are not under the supervision of regulatory authorities, banks are and will be held accountable for compliance of all 3rd parties in its ecosystem. These requirements have been further clarified in an interagency agreement published by the Federal Reserve, OCC (Office of the Comptroller of the Currency), and FDIC (Federal Deposit Insurance Corporation) on 3rd party risk management in 2023. This creates additional complexity, as fintechs may not always be familiar with the regulatory landscape that banks operate within. The stringent and often complex nature of financial regulations means that any misstep can have significant repercussions, making compliance a top priority.

To mitigate these risks, banks should engage their compliance teams early in the partnership process. By involving compliance experts from the outset, banks can help fintechs understand the necessary regulatory requirements and ensure that the partnership operates within legal boundaries. This proactive approach allows for the identification and resolution of potential compliance issues before they become problematic. It also helps in building a solid foundation of trust and understanding between the bank and the fintech, which is crucial for a smooth and successful collaboration.

The Future of Bank-Fintech Collaborations

Looking ahead, the future of bank-fintech partnerships is likely to be characterized by deeper integration and collaboration. However, this evolution is occurring against a backdrop of increasing regulatory scrutiny, particularly regarding third-party relationships. As regulators ramp up oversight, driven in part by recent failures and the accelerated adoption of AI technologies, banks are becoming more vigilant about the risks and, hence, selective about whom they enter into partnerships with. This growing caution is reshaping the dynamics of partnerships, as financial institutions must now navigate a complex regulatory landscape that demands robust compliance oversight and monitoring.

As customer expectations continue to change, banks will need to innovate constantly. This ongoing need for innovation will drive banks to seek out new fintech partners and explore novel solutions. However, the increasing regulatory pressure means that these partnerships must be built on a foundation of compliance and risk management. The partnerships that emerge will likely focus on enhancing customer experiences, improving operational efficiencies, and addressing emerging challenges in the financial landscape, all while ensuring adherence to regulatory standards.

One notable development that may shape the future of bank-fintech collaborations is the growing momentum around open banking in the United States. While the U.S. has been slower in adopting open banking compared to other countries, recent years have seen increased regulatory interest and industry initiatives aimed at promoting data sharing and API-driven innovation. As open banking gains traction, we may see a proliferation of new partnership opportunities between banks and fintechs, as well as increased competition from non-traditional players entering the financial services ecosystem.

Ultimately, the success of future bank-fintech collaborations will depend on the ability of both parties to navigate the evolving regulatory landscape, prioritize customer needs, manage risks, and foster a culture of innovation and trust. By embracing the potential of these partnerships while remaining vigilant about compliance, banks and fintechs can work together to create a more dynamic and customer-centric financial system that meets the demands of the future.