Bank partnerships are a critical part of most US fintech offerings. Getting them wrong can delay your launch by several months, derail your product roadmap, hurt your onboarding process, and negatively impact your customers’ experience.
In the worst case scenario, it can even sink a fintech company.
Anyone who has had to switch bank partners knows it’s not easy and takes a lot of work. These migrations are complex and drain a ton of resources from product, customer success, legal, partnerships, and engineering teams.
Our goal with this guide is to help you avoid ever having to switch bank partners. It’s packed with in-depth tips that will help you select the right bank partner for your business the first time.
Covered in this guide:
- What is a bank partner?
- Why do fintechs partner with banks?
- How fintechs typically approach bank partnerships
- Factors to consider when selecting a bank
- How to select a bank partner
- List of US sponsor banks
- Tips on how to work well with a bank partner
What is a bank partner?
A bank partner, or sponsor bank, is a federal or state chartered bank that a fintech partners with to offer financial services.
In the context of card issuing, bank partners are members of one of the card network associations (such as Mastercard or Visa). They can sponsor you for a BIN (bank identification number – the first 6–8 digits of a card number) and sponsor your access into the networks.
Not every sponsor bank is a member of all card networks. Keep this in mind when you’re selecting a bank partner, especially if you’ve cut an incentive deal with one of the card networks.
Why do US fintechs partner with banks?
To offer banking services in the US, an institution generally needs to have a bank charter or partner with a chartered bank. You can think of a bank charter as a “license to be a bank.”
By partnering with a chartered bank, a fintech can embed banking services into their product and conduct a variety of activities that they otherwise couldn’t, such as:
- Opening bank accounts
- Holding deposits
- Issuing cards
- Lending money
Technically speaking, the bank still holds the deposits, issues the cards, and lends the money. But they do so on behalf of the fintech they’ve partnered with.
Bank partnerships also allow fintechs to access a Federal Reserve account, which gives them access to move money via the Fed’s payment systems (e.g., wire and ACH). By partnering with a bank, fintechs can effectively leverage that bank’s Fed master account to send and receive money through these rails.
Access to these rails is restricted to chartered banks, but there has been some discussion about the possibility of non-bank chartered entities (like fintechs) getting access to Fed accounts in the future.
How fintechs typically approach bank partnerships
There are three main ways that fintechs solve the need for a bank partner:
- Direct bank relationship: You partner and integrate directly with a bank, and manage the relationship with the bank directly. This allows greater control over your program, but maintaining the program can be very complex from an operational and compliance perspective, and that requires significant time and resources. This is generally a good option for operationally mature fintechs. In the context of card issuing, this approach is what you’d expect to see for a company that is planning to act as their own program manager and looking for a “processor only” engagement with an issuer processor.
- Program manager. You partner with a BaaS provider or card issuing platform that already has bank relationships/integrations, and they act as your program manager. This approach gives you less control over the bank relationship, but is the easiest and least resource intensive option. This is often a great option for most fintechs, especially those that are just starting out.
- Become a bank. You acquire a charter or bank and become your own bank partner. This offers the most control, but is the most challenging and resource heavy route. It’s also extremely hard to pull off and typically more of a BaaS partner play than one for a customer-facing fintech. Examples include Column Bank, which gained its national charter by acquiring NorCal bank for $50mm, and LendingClub acquiring Radius Bank.
Bank partner capabilities
Fintech bank partners offer different capabilities, strengths, and weaknesses. Some focus on specific offerings. And they’ll all have different processes and preferences for working with fintechs. Here are some ways to break it down:
- Lending vs. payments
- Card-based lending vs. traditional loans
- Credit cards vs. prepaid cards
- Payment acceptance
- Account opening
It’s important to note that just because you partner with a bank, doesn’t mean you’ll be able to leverage all of their offerings. A bank can approve a broad set of services for one fintech while declining to support a similar program for another fintech that the bank perceives as riskier.
Factors to consider when selecting a bank
Experience: Ideally, your bank partner should have experience supporting the types of products you’re launching or it may slow your timeline and might make the relationship more difficult.
Physical location: The bank’s physical location can impact its ability to support your product due to state regulations concerning fees, escheatment, etc. Bank representatives might also want to come to your physical location to review your program.
State banking laws can also vary when it comes to issues such as:
- What fees you’re allowed to charge, and how much
- Whether banks can service cannabis companies
- What licenses are required for transmitting cryptocurrency
- Whether banks must review your program on-site
Risk appetite: Some banks may have reservations or policies against working with industries they categorize as high risk, such as cannabis, crypto, resellers, or peer-to-peer lending.
Fintech Evaluation: Fintechs can draw scrutiny from regulators, and that translates to additional scrutiny for their partner banks. When you engage with a potential bank partner, you should seek to understand how they evaluate risk and underwrite programs. This will help you understand what capabilities they are willing to support, and to what extent.
Contract terms: There are a few key terms you may want to evaluate and negotiate with a bank partner. We’ve included some examples below and go deep into the negotiation process later in this guide. Note: this will vary program to program and bank to bank and should be looked at as different levers you may want to pull to get your desired terms.
- Length: 1 year, 2 year, 3 year, 5 year
- Pricing models: Interchange take rate, account per month, deposits originated
- Exclusivity: Being exclusive means you can’t have an additional bank partner for redundancy/optionality
- Minimums/reserves: Varies by bank, many will ask for a three-day or a four-day reserve against your transaction volume
- Fees: setup fees, diligence fees
- Responsibilities: Who will handle transaction monitoring, SAR filings, etc.
Desired financial benefits: Some banks will also seek other kinds of financial benefits, which may include wanting equity in your company or the opportunity to participate in a debt facility. Others may simply want to obtain deposits, make transactional or interchange revenue.
Connections and advocacy: A great sponsor bank will expand your network by introducing you to important industry contacts, and may even help with your company’s marketing.
User friendliness: Is the bank easy to work with? Try to get a sense of the bank’s turnaround for approving documents such as marketing materials, and their openness to using different tech platforms for, e.g., managing and tracking materials you submit for the bank’s review. You can learn this from talking with the bank but you should also interview the bank’s other fintech customers.
Willingness to innovate: What if you’re trying to support a new use case that hasn’t been executed successfully before? Some banks may be open to trying novel program structures or first-principles regulatory thinking. If it’s important for you to find a bank partner that is willing to consider how a new and novel program could be compliantly structured, you should make this part of selection criteria.
How to select a bank partner
We’ve outlined a model process for finding a bank partner that meets your company’s unique needs below.
Determine your exact banking needs
Your product offering determines your operations, transactional, legal, and other needs, so start by figuring out what you want. For example, do you want a Durbin-exempt bank? Do you want a bank partner that can support Visa and Mastercard? Write down an exhaustive list of your wants and needs in a spreadsheet.
After you’ve figured out what you want and need from a bank partner, you can put together a list of banks to initiate conversations with. The best way to do this is by talking to other fintech operators and asking them about their experiences with different banks, digging into what products and services they offer and what it was like to work with them.
Once you’ve got a good list, it’s typical to do a Request for Proposal (RFP) with 5-10 banks. Send them information about what you’re looking to accomplish, ask them some questions in writing, set some deadlines, and get a ballpark estimate on pricing. There are a few specific items that banks will ask you for, such as what your flow of funds looks like, your funding to date, and how your program will work. Be ready to have that information ready.
From here, you can start to narrow down potential partners. Many of this will usually come up during calls, but the point of having it in writing is to have a record for later discussions.
If you have the time and capital, consider engaging a consultancy like Accenture for support. Accenture has a bunch of folks that have longstanding ties to the best-run banks that you will want to work with and can run an RFP process for you. They can also be a huge help when it comes to negotiating pricing. iLEX Consulting Group and Fintech2bank are also experienced in helping fintech companies partner with banks, including sourcing, negotiation, due diligence, vendor selection, compliance, and implementation.
Note: there are costs associated with engaging an outside firm, so if you're smaller you'll need to budget for it, run the process yourself (which is what we see many fintech companies do), or wait until you’re more established and have more resources.
Consider internal resources for due diligence and compliance
Simultaneously, you’ll need to get familiar with the compliance requirements for executing your offering. Larger sponsor banks like Cross River Bank, Evolve Bank, or Sutton Bank will conduct a very thorough diligence process before they share pricing or a term sheet.
Banks move at their own pace. In some cases, established fintech companies that have the potential to bring immediate business to the bank can motivate the bank to move more quickly than usual. Smaller fintech companies may have a harder time working with the bank to match their timeline. Finally, some bank partners will not even consider supporting your program if you don’t have the right operational maturity.
That’s why going with a BaaS provider or card issuing platform like Lithic can often be the best option. You can bypass the sponsorship market altogether, build scale, and then graduate to a direct bank relationship when you have more bargaining power and the proper compliance and partnership infrastructure in place.
If you need access to legal and compliance templates, check out our Lithic Legal Library. It’s a free, open repository of standard legal templates needed to launch a card program.
Identify goals for your banking relationship
You’ll also want to think through specifics of how you picture your bank relationship operating.
Do you want to own the customer relationship and/or the data? Do you expect to diversify the business to include additional products and services in the future?
These are important questions to answer because the bank partner you choose may not be able to support the product offerings on your long-term roadmap, which means you’ll either need to find another bank for that product or migrate all of your products to another bank partner altogether.
Either of those outcomes isn’t ideal. Managing two separate programs at different financial institutions is operationally complex and time consuming. Migrating your program to a different bank is also extremely difficult, and could lead to churn because it will involve reissuing cards and getting your customers to activate and switch to the new card. But you can often migrate the BIN which could potentially cause less churn.
It’s not uncommon for fintechs that migrate their programs to continue to support two separate programs for a period of time to give their customers time to migrate to the new program.
Negotiate a bank partnership agreement
Once you’ve landed on your shortlist of potential banks, it’s time to start negotiating a term sheet and eventually the full legal terms.
Things to consider when negotiating a bank partnership agreement:
- Key operational aspects of your bank partner relationship (i.e. how you and the bank partner will work together). For example, you may want to drill down on the process for handling bank signoff of marketing materials and establish some SLAs and turnaround times for these kinds of requests. Many times a bank will punt on the most important terms such as SLAs around marketing reviews, termination rights, or exclusivity until you get to the definitive agreement. These surprises can lead to longer negotiations so you’ll want to call that out in the RFP early on.
- The framework for escalating issues. For example, you may want to have a representative on each side (i.e., bank and fintech) as a designated contact for escalating issues. This group can come together and help resolve differences of views.
How to handle disputes with your bank partner. Consider whether you want to take disputes to arbitration or litigation. Arbitration can be smoother and more cost-efficient. The alternative, litigation, can take longer and be more expensive, so parties will be less likely to litigate minor issues. However, litigation is more public, and a bank, for example, might not want to be involved in a dispute with a fintech partner publicly.
If you don’t have internal legal expertise or would like support from experienced outside counsel on bank partnership contracts, here are some law firms you may want to consider:
- Baird Holm. They often represent banks and fintechs, so they’re very current on the latest trends in the sponsorship market.
- Davis Wright Tremaine. They have a strong fintech and bank sponsorship group, and are well known in the fintech industry.
- Ketsal. Great with credit and always current on the latest trends. They can also handle your entire negotiation with bank partners.
- Morrison Foerster. They have deep knowledge on lending and credit, and are experienced in negotiating credit sponsorships. They can also be helpful in navigating areas like product, servicing, collections, and hidden credit alternatives.
Pricing and Economics
Aligning on pricing and economics is part of negotiations, but there’s a lot to say on this topic so we’re breaking it out into its own section. The pricing a bank will offer you will depend largely on the services they will be providing to you and other aspects of the relationship.
Here are a few common elements you’ll likely see in pricing:
- Pre-product launch milestone fees. You’ll usually see some of these fees kick in once you sign the term sheet and when a program launches. You may also see a few milestone fees along the way if the go-to-market timeline is on the longer end, and perhaps a late fee if you’re slow to get to market. This can also include fees for marketing reviews and compliance.
- Ongoing fees. This varies depending on your product type. If you’re in the payments or lending space, this will usually take the form of a few basis points on your volume. One-time and transaction fees are also quite common. This can also include repurchase fees, interest payments, warehousing fees, and ACH fees.
Additional comments:
- Lending pricing can be more complex, but largely depends on what you’re trying to do.
- When you have a true DDA debit project, you may start to see a lot more fees come into play, especially if you’re accessing bill pay, wires, or ACH.
- Again, a good outside counsel can be helpful in navigating and negotiating pricing.
Launch the partnership
Once you’ve signed a contract with the bank, the fun begins. Early steps after launch include drafting customer-facing agreements, disclosures, and marketing materials. Check out our legal library for free standard templates you can use for card programs.
Find additional service providers as needed
Your sponsor bank is integral, but they are not the only partner important to your business. You will likely need additional service providers such as compliance technology companies, card manufacturers, issuer processors like Lithic, and other partners.
Sponsor Bank Landscape
If you’re looking for a bank partner to help you launch a financial product, our friends at Notafintech.co have been maintaining an open source list of banks, processors, and debt providers. Tearsheet also put together a list of sponsor banks a couple of years ago, which may be also worth taking a look at.
You can also check out our podcast episode for a deep dive on sponsor banks.
Tips on how to work well with a bank partner
Build rapport. It’s crucial to have a good working relationship at your sponsor bank, as well as a point-of-contact who supports your business and who can smooth out any challenges. Establish escalation contacts and build a solid overall relationship before any issues arise.
Be responsive. Don’t let any potential issues linger. Be quick to investigate and start resolving them. Often, flagging and proactively resolving issues in a fintech program can build credibility with a fintech’s bank partner if handled well.
Consider redundancy. Having multiple bank partners can be valuable because you might need to part with an existing bank unexpectedly. Good operators keep that risk in mind, so consider whether you should explore additional potential bank partners. This is generally more of a consideration for more mature fintechs.
Come ready to explain your requests. Pair your requests for bank partners with a short writeup or a deck that addresses why the request is safe and compliant.
Your sponsor bank will be working on multiple programs and they may not have the full context as they approach your program. Explain what you’re trying to accomplish, your business goal(s), why it’s compliant with a link to the regulatory site that says it’s compliant. If you’re thorough at the beginning it helps the bank see a safe path to saying yes.
Additional Resources
- Selecting a bank partner, Fintech Layer Cake podcast
- Common problems with bank partners by Ayokunle Omojola
- How to select a bank partner, courtesy of Aaron Frank and Notafintech.co
- Best practices in bank-fintech partnerships, by QED Investors and BCG
- Popular sponsor banks for fintech programs by Jared Franklin