The start of a fintech partnership can be an exciting moment for a community bank or credit union. The end of one? Not so much.
There are a variety of different types of partnerships financial institutions can have with fintechs, ranging from vendor service agreements to more complex, intermingled relationships. One of the most complicated arrangements is banking as a service, where a nonbank offers the bank’s financial services to the nonbank’s customers. The financial institution becomes what is known as a sponsor bank; there are different types of sponsorships a bank can become involved in, such as deposit accounts, credit cards, lending or payments. The wind down of these partnerships may be a new experience for banks that have entered this space in the last several years.
In the past, a fintech may have outgrown its bank partner and exited one partnership to move to a larger or more sophisticated bank. The exits now have a different tone and driver, says Richard Malish, general counsel at New York-based Community Federal Savings Bank. Community Federal, which has $689 million in assets, has years of experience as a sponsor bank specializing in card programs.
“I know there are many in the industry who have never really dealt with the termination or wind down,” he says. “But everything changed in the last year or so. With all the regulatory scrutiny, banks started to de-risk their fintech relationships and fintechs lost bank partners left and right.”
Winding down a partnership can be a complex, prolonged process, given the intertwined relationship between a bank, its fintech partner and that fintech partner’s customer. It can take months to hand off a fintech’s customers to a new bank — if the fintech can find one. If the fintech shuts down, the bank may even need to assume customer communications and account close duties.
Banks are required to think about the lifecycle of their fintech partnerships, including how they could end and exit them, says Andrew Grant, a partner at Ketsal PLLC who specializes in bank-fintech partnerships. The contract, or master service agreement, should include what happens if the program needs to be wound down as a way to address responsibilities, minimize uncertainties and protect the bank.
The sponsor bank may even need to step in and manage the program to protect customers and its own interests. Sponsor banks should think about contingency and transition plans, the institution’s ability to bring customer communications in-house and any mitigation techniques like arbitration or legal proceedings it may need to use. If a sponsor bank or credit union hasn’t needed to exit a fintech relationship yet, Malish recommends executives perform a tabletop exercise to run through the wind down, as a way to identify gaps.
“[M]ake sure you have the flexibility and rights that you need to keep your bank safe,” Malish says. “Your clients, and the entire fintech and banking industry, will be much better off when you can look your regulator in the face and say that you’ve managed your third-party relationships appropriately and that you’re acting in a safe and sound manner.”
For additional reading:
• Third-Party Relationships: Interagency Guidance on Risk Management
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