- Key insight: Some banks now require ledger transparency and daily data access from fintech partners.
- What’s at stake: Operational failures can prompt regulatory enforcement, reputational harm and program shutdowns.
- Forward look: Expect tighter contracts, routine SOC 2-style audits and clearer account architectures.
Source: Bullets generated by AI with editorial review
Bank-fintech partnerships have been strained over the last few years. Several banks offering banking-as-a-service for fintechs have been hit with
What does it take to build a strong bank-fintech partnership that works, where nothing gets lost or falls through the cracks or goes awry? Read on for six ways banks and fintechs have changed their approach to working together.
Fintechs have matured
“I think what we’re seeing is the moment of maturing in the fintech entrepreneurial community,” said Sarah Biller, co-founder of Fintech Sandbox, co-founder of Vantage Ventures and board director of Thread Bank, in an American Banker podcast that will air November 18. “When I started building my companies over a decade ago, I don’t think we had that. There was a lot of hubris, and maybe modest, if any, regard for the regulatory guardrails that had been put in place and well learned.”
This has gradually changed, she said. “What happened with
The fintechs Thread Bank works with today “come with a level of enterprise readiness and understand the conforming conventions that are necessary to meet our regulatory requirements,” Biller said.
The balance of power has shifted toward mature fintechs that are getting partnerships done, said Jason Henrichs, CEO of the Alloy Labs Alliance.
“Fintechs held all the power when every bank was desperate to get into partner banking and thought they had it all figured out,” Henrichs told American Banker. “Many fintechs and banks took the easy path and paid the price. Building these partnerships is not easy and there is no ‘one size fits all.’ Banks are demanding fintechs have their compliance ducks in a row and they are philosophically aligned on approach for when things inevitably get challenging. The best fintechs know this is the right approach and will pay dividends in the future.”
Banks are demanding transparency
“The approach that I have to fintech partnerships generally is trust but verify,” Patrick Slain, vice president and director of fintech at Stearns Bank, told American Banker.
One way banks can do this is by creating data access agreements that give the bank direct access to fintechs’ ledgering and processing systems. The bank should get the data on a daily basis, Slain said.
“If that fintech partner goes away unexpectedly, the bank should be able to recreate the ledger, process all of the transactions and fulfill all of the obligations of the program yourself,” Slain said.
Banks should have been doing this all along, and the best banks in the space do this well, he said.
Transparency is back, and “it isn’t a bad thing,” Henrichs said. “If you look back in history, this was not only common, it was expected by both sides. Ultimately these are the bank’s accounts and it is impossible for a bank to manage these accounts without this transparency.”
Across the industry, there’s still variation in how transaction monitoring is handled, which underscores the need for consistent standards, said Sima Gandhi, co-founder of the Coalition for Financial Ecosystem Standards, which has developed a set of standards for fintechs that want to work with banks. CFES Standard 1.6 states that, “Nonbanks should monitor transactions for unusual activity and escalate that activity in a timely manner according to their regulatory or contractual requirements.”
“The key is that monitoring must be built into the partnership and executed at a level commensurate with the risk,” Gandhi said. “For too long, compliance has been focused on theater; it needs to focus on substance and actual risk management. What we’ve observed is less a focus on ‘who’ does the monitoring and a shift to ensuring that the monitoring is done well and matures along with the program, with appropriate insight by the bank to evaluate whether the approach meets appropriate risk management practices.”
Banks are closely monitoring fintechs and baas middlemen
In the past, some banks have over-relied on middlemen like Synapse to handle fintech relationships and data in a compliant manner.
One way to keep tabs on such third parties is by asking for SOC 2 type audit reports, which can help verify the integrity of a third party system and ensure that things are operating smoothly.
“You also should be making sure that you’re reconciling yourself against the Fed, against your for-benefit-of or omnibus accounts, against potentially individual customer accounts or sub ledger of FBO accounts,” Slain said. “You should be making sure that the chain of activities aligns to what your expectations would be as a bank, and that’s really part of your oversight obligations.”
Banks that run strong banking-as-a-service programs never gave up this oversight, Henrichs said.
“It was only that the loosey-goosey days led to a bunch of banks and fintechs thinking it wasn’t necessary,” he said. “The banks that thought this was easy either because they are ‘good at compliance’ or were leaning on their partners to manage the fintechs have been washed out of the system either because their boards don’t want to make the investment because it is non-core to their strategy or they are being forced out under regulatory pressure.”
Omnibus accounts are being rethought
Having the transactions of multiple fintechs all jumbled together in one omnibus, for-benefit-of bank account sounds like a disaster waiting to happen. But some experts say it doesn’t have to be.
“It depends on how technology is architected,” Slain said. “There may be a way that that might make sense, but you have to understand and be able to fully explain and articulate how it’s architected and structured in a way that all customer funds are not commingled, that they are in separate accounts. The system of record is the ledger, and that’s where you are going to get the individual customer’s balance. That’s what you’re reconciling to. So I think that it’s possible. It’s difficult and it requires a lot of data and insight and understanding and clarity.”
Banks are enforcing fintechs’ compliance with banking regs
“Banks are ultimately responsible for BSA AML obligations for consumer and business deposit accounts for most payments activity,” Slain said. “So it’s very much a question of, are you reviewing and approving BSA AML policies and procedures? Are you testing against those BSA AML policies and procedures? Are you getting independent BSA audits done of your programs on a regular basis to ensure that there’s independent verification of the activities being done the way that they’re supposed to be done?”
Bank-fintech contracts have gotten tighter
The drafting of contracts between banks and fintechs has also matured, Henrichs said.
Well-written contracts are “a good thing to be able to fall back on,” Slain said. “If it’s done well and correctly, it allows both the fintech and the bank to understand exactly what the responsibilities and obligations are of each side, and it allows an accountability point where if either party is not meeting their obligations, you can point to what was agreed to.”
Banks are generally bad at communicating effectively in this space, and unclear as to what the expectations are, he said. “They’re also very good at hiding behind regulatory privilege.” The best banks in this space are communicative and transparent with their partners, he said.
“What’s encouraging is that banks and fintechs are now having more substantive conversations about what good risk management looks like,” Gandhi said. “That’s creating space for innovation that’s both responsible and sustainable.”