For a fintech, finding the right bank partner accelerates the path to product launch. By partnering with a bank, the fintech is able to leverage the bank’s charter to deliver a uniform product across those states. This can be invaluable to a fintech seeking to maximize the potential market for its product while minimizing the number of adjustments at the product level for each state.
A Strong Partnership Enables Innovation within Regulatory Parameters
From the bank’s perspective, fintech partnerships enable the bank’s legacy products, such as payments and savings accounts, to be delivered through groundbreaking new platforms created by fintechs. Banks recognize the value of the innovation and improved customer experience on these platforms for driving increased adoption of the bank’s services, especially among underserved and mobile-first populations. The key to a successful partnership will be in maintaining oversight and managing regulatory governance of the fintech and its products.
Program Agreements Are Largely Shaped by the Bank, though Fintechs Can Add Flexibility in Some Areas
At the heart of the partnership between a bank and a fintech are the program agreements that govern the fintech’s right to use the bank’s services, and the bank’s obligation to provide those services within defined parameters. Typically, the program agreements lay out the framework for the fintech to offer loans, cards, accounts and underwriting, and provide disclosures to customers. Because the bank needs oversight over all of these functions, the bank is the ultimate arbiter of the program agreements and will impose controls such as approval and recordkeeping requirements.
The goal of a fintech in these negotiations is to provide room in the program for it to innovate within the parameters set by the program agreement. Therefore, a fintech should set clear goals on where it wants operational discretion. Examples of such contract provisions where fintechs may want to pay particularly attention include:
- Underwriting guidelines that allow the fintech discretion to make adjustments within a preset range, and still guaranteed to be funded by the bank
- A timeline process for review of loan product changes that require bank approval, to ensure the fintech can iterate as needed
- Limited exclusivity rights of the bank to products that are substantially similar to the product offered in the lending program, so the fintech can grow and expand into new lines with new bank partners
- A definition of customer relationships that gives the fintech the ability to market additional products and services beyond those available through the bank’s lending program
Considering true lender risk in bank partnership negotiations
Although fintechs may wish to have wide discretion in offering the bank’s products, it is the bank’s product. Ensuring that the bank had sufficient control of and economic interest in its products is broadly referred to as the “true lender analysis” of a bank program. If a fintech has control over certain elements of the program and retains all economic risk related to a loan, a regulator or plaintiff may allege that the fintech is the true lender, not the bank, and that the fintech is therefore engaged in unlicensed lending or charging impermissible interest rates or fees. In bank partnerships, “true lender” risk is a critical regulatory risk and will be pivotal in the negotiation of any partnership agreement.
Compliance and Fraud Prevention Are Key Obligations for Fintechs in a Bank Partnership
As regulated entities, banks have a large set of compliance obligations that they need to flow down to third parties with whom they collaborate, including fintech partners. These obligations cover a wide range of topics, from secure handling of customer information to marketing products in a compliant manner. The issue of fraud prevention is particularly important because of the associated financial impact, so the fintech should carefully review the partnership agreement to determine who is responsible for fraud prevention (fintech, bank, payment processor, vendor) and who has financial responsibility. Simply hiring a vendor to perform fraud prevention tasks will not absolve the fintech of its financial responsibility for fraud.
State variation in recognizing bank partnerships
Fintechs should also keep in mind that partnering with a bank does not always render state compliance obligations inapplicable to the fintech. Some states use exemptions from federal preemption of their state's banking laws, so a national bank and its fintech partner would still need to independently comply with requirements from those states. For example, in June of this year, Colorado passed legislation that opts out of federal consumer lending rate caps and instead applies rates established in the Colorado Uniform Consumer Credit Code. ( Colo. Rev. Stat. § 5-1-101.)
About our team
Highly Effective Bank Partnership Attorneys at Scale LLP Position Fintechs to Succeed
An experienced and dynamic legal team is a tremendous asset to any fintech in its bank partnership journey. From evaluating potential partners and their offerings, to documenting the partnership agreement, and throughout the lifecycle of the initiatives launched with the partner bank, legal counsel helps the fintech achieve its objectives for the partnership and manage the associated risks.
Highly effective bank partnerships counsel has:
- Experience advising in house at banks and fintechs
- Familiarity with different financial products — including lending, cards, accounts, real estate alternative financing, and mobile payments
- A nimble mindset that is adept at spotting growth opportunities for clients
