Blog Posts

June 1, 2023

Bridging the Disconnect Between Fintechs and Banks

Carsten Luth

Imagine this: you’re a fintech that just spent a year interviewing banks, negotiating an agreement, setting up a process to work together, and you’re ready for market launch. Suddenly, the bank has a bunch of roadblocks they need you to overcome before they will let you start onboarding customers. As the weeks turn to months, you start to wonder: where is this coming from?

The world of finance is undergoing a profound transformation, and staying ahead of the curve is essential for anyone aiming to build a fintech product that can successfully navigate the uncertain times we find ourselves in. But what are banks and investors currently seeking to invest in, especially in light of lessons learned from interest rate changes and the successes and failures of recent product releases? Read on to gain more insight into successfully navigating the world of fintech-bank partnerships, especially as it relates to developing a customer acquisition strategy a bank partner can get behind.

The go-live disconnect between fintechs and banks usually comes from the difference in their incentive structures. This difference mostly stems from who has the greatest weight of influence in business decision-making. For banks, regulators often have a greater weight of influence than investors or shareholders, while fintechs are typically influenced most by their VC or private equity backers. Where banks are motivated by their stakeholders to evaluate risk and compliance, fintechs are motivated to build, ship, and find market fit for compelling products. These competing priorities typically come into conflict at a critical junction — right when the fintech is looking to release the product into market.

The Go-Live Disconnects between Fintechs and Banks

Objects of concern may be obvious to an experienced banker without being obvious to someone new to the space — a product manager launching an embedded finance product may be unwittingly behaving in a way that sets off red flags at the bank. When banks do their diligence on the companies they work with, they can uncover a number of complications in the process: a fintech may have an improper FDIC notice, be using the word “bank” in its name, or just even have confusing or potentially misleading marketing, among other missteps.

The go-live evaluation is when risk becomes a central theme for the bank. There is a wide spectrum of risk when you’re a bank, from reputational risk to regulatory, legal, and operational risks, and beyond.

Even if a savvy fintech can identify ways to mitigate risk, a bank’s decision to sponsor their financial services still remains a highly subjective one. There’s no one-size-fits-all method for a successful bank sponsor relationship, but there are some common patterns that builders of financial products should be aware of at the earliest stages of product design.

Let’s go through some well-known disqualifiers that have stopped these partnerships before they can even start.

“We will serve a demographic that other banks or fintechs won’t.”

Consider a fintech that aims to serve unbanked or underbanked businesses in high risk industries. While this demographic may seem lucrative due to their higher potential for winning a primary banking relationship, it will raise certain concerns for the bank partner. They may worry that the business model relies too much on flighty customers and may create incentives to cover up bad behavior. Consequently, the bank partner may question the viability and sustainability of that fintech's customer base. The bank will wonder whether the fintech has factored in the additional cost of managing this risk, and further, whether they are willing to bear that cost not down the road, but at launch.

The allure of servicing customers on other banks' restricted lists is obvious: low customer acquisition costs with high stickiness. Those customers generally don’t have other options, but it's worth considering why they are singled out. Fraud, high chargebacks, or bad KYC practices have a disproportionately higher cost to the bank partner than they do to the fintech in the form of regulatory fines or additional audit requirements. If you, as a fintech, want to go down this road, you’ll need a lot of compliance expertise, which can be hard to hire as a startup. And it may make the bank partner you’re working with doubt whether you’ve done enough research to support that customer base.

“We will offer a more comprehensive solution.”

Providing a more comprehensive solution may be a great ambitious goal, but it raises a bank’s concerns about the fintech's ability to execute and manage operational risks effectively. Suppose a fintech intends to offer a wide range of financial services, like banking, investment, and insurance products. Who will own each area of the fintech's operational infrastructure? Will one stakeholder within the company be responsible for multiple areas? Does the team have expertise running each of these areas at scale? Is there a plan for hiring and training as the company scales quickly? 

It’s not about “move fast and break things.” You’re better served by a "crawl, walk, run" approach that lets you mitigate risks while refining your offerings and gaining the trust of your bank partner. From what we’ve seen in the market, many savvy fintech investors are pivoting to look for opportunities to invest in companies that are building strong, long-term value by establishing a trusted brand built over time.

“We’ll attract customers by offering cheaper services/faster payments/better rebates.”

While aiming to attract customers through cheaper services, faster payments, or better rebates may seem like a winning strategy for a fintech company, there are potential concerns for the bank that go beyond the surface-level benefits. If these benefits are afforded by cutting corners or overlooking compliance processes, the bank will not want to approve the program to operate.

Suppose a fintech offers lightning-fast payment processing without having robust anti-money laundering (AML) and know-your-customer (KYC) procedures behind it. Prioritization of speed may seem like a small compromise in the pursuit of attracting customers. But this approach can be a red flag for banks.

When banks approve a program, they put their license and ability to grow at risk, so they prioritize compliance to ensure the safety and security of their operations over rapid growth. This means they will easily turn down a noncompliant fintech partnership even if that fintech's business model seems promising.

Synapse Bridges the Gaps between Fintechs and Banks

Navigating fintech-bank relationships can be complex, to say the least. Synapse bridges the gap we’ve been discussing here by operating a platform where many of these risk considerations are built directly into the product. We provide technical support, compliance operations, and guidance on critical decisions in order to keep programs by-default in good standing.

If you are developing a next-generation financial product and resonate with our approach, we invite you to connect with us. Together, we can shape the future of fintech-bank partnerships and drive innovation in the industry.

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Bridging the Disconnect Between Fintechs and Banks

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Carsten Luth
June 1, 2023

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