Today, I want to begin by talking about the Olympics – because why not? The Olympics are fun. This year, I watched an event that I first saw at the last Olympics and enjoyed watching it again: speed climbing.
In speed climbing, two athletes race to climb a 50-foot wall as fast as they can, trying to beat their opponent to the top. It’s amazing because the wall is about 50 feet tall and has large red holds. However, the holds are not ideal for most angles and can be difficult to grip. Adding to the challenge, the wall is not vertical; it tilts back about five degrees. So, if you stand under it and look up, by the time you reach the top, you’ve actually moved further back from where you started.
Watching someone tackle this wall and climb it in under five seconds is incredibly impressive. If you look closely at what they’re doing, you’ll see that they skip holds, jump, and cover a lot of ground very quickly. It’s truly amazing to watch.
I enjoy rock climbing. I started a few years ago, and while I’m not nearly as good as those athletes who compete in the Olympics and probably never will be, I really enjoy the sport and learning about it. One thing I’ve discovered about rock climbing is that it’s very technique-intensive. If you understand and properly employ the techniques, climbing becomes much easier than it would be otherwise. Over time, you can progress from scrambling and struggling to more challenging climbs with greater ease.
So, what does this have to do with banking, finance, and law? Technique. Today, I want to discuss techniques for use in banking and fintech partnerships. In recent years, there has been a notable trend of fintech organizations and banks forming partnerships to offer new financial services and innovative products. Similar to rock climbing, partnering with banks and other financial services firms requires employing key techniques to streamline the process and enhance the effectiveness of the services provided. These techniques can significantly simplify collaboration and improve the way financial services are delivered.
DIVISION OF RESPONSIBILITIES
The first key technique is the division of responsibilities. When a bank and a fintech firm decide to work together, they must clearly define who does what. At first glance, this may seem straightforward, but the details can be complex.
LICENSING REQUIREMENTS
One important aspect to consider is licensing requirements. If the fintech firm handles certain activities, it must obtain state and/or federal licenses to offer those services in the United States or specific states. On the other hand, a bank already has a banking charter that permits it to offer a wide range of financial services and activities across multiple states without needing additional licenses. While it may seem like just a matter of obtaining a license, the reality for a fintech firm is much more daunting. Facing the prospect of acquiring and maintaining 10, 15, 20, 30, or even 50 different licenses involves significant expense and time commitment. This can be a major undertaking in itself.
Therefore, when dividing responsibilities, it’s crucial to determine which activities the bank should handle and which activities the fintech or financial services organization can manage without needing extensive licensing. This careful allocation of tasks can streamline operations and reduce regulatory burdens.
SOFTWARE DEVELOPMENT
Software development is another crucial aspect to consider. Often, a fintech firm has greater software development capacity than a bank, making it logical for the fintech firm to handle the development tasks. While this seems sensible at first glance, the reality is more complex.
The situation becomes complicated when you consider encryption needs, privacy requirements, and the division of where data is held and delivered. Adding SOC-type audits further increases the expense and difficulty. As a result, banks often assign the technology to a separate financial services provider that is better equipped to handle these challenges. This approach can streamline operations and ensure that the technical aspects are managed effectively and securely.
RECONCILIATION, REPORTING, AND TRANSACTION STRUCTURING
Certain activities, such as reconciliation, reporting, and transaction structuring, often need to be handled jointly. We’ve seen in the news how critical these functions are. While one entity might primarily handle them, both sides need significant visibility to manage reconciliation and transaction processing services effectively and ensure they are done correctly.
When engaging in a bank-fintech partnership, it’s essential to clearly define responsibilities. Take your time to outline who is doing what, particularly at different points in the customer acquisition and service delivery process. Ensure you have considered these aspects at both a high level and in terms of processes and policies for both groups.
OVERSIGHT
Next, let’s discuss oversight. When building out processes and defining responsibilities, it’s crucial to establish mechanisms for each partner to ensure activities are being performed correctly on both sides. This can be challenging, so thoughtful planning is required for managing reporting, assigning tasks, and ensuring accountability.
LICENSING OF TRADEMARKS AND SOFTWARE
Licensing for trademarks and software is another important aspect to consider. In many partnerships, there’s ongoing software development and branding, often tied to a new product or service. Key questions include: Who owns the brand? Who owns the software? Who is responsible for developing the software? Who will ultimately own the different components?
It’s crucial to sit down and determine who handles marketing, who builds the brand, and who retains ownership of the software and trademarks. These are important considerations and can vary depending on the circumstances. Sometimes, the bank should retain one or both of these elements, while other times, it makes more sense for the fintech company to do so. These decisions need to be documented to ensure the partnership is managed consistently from the start.
MONITORING AND ENFORCEMENT
Ongoing monitoring and enforcement are essential. If you set policies, procedures, and reporting methodologies, it’s crucial to follow them. Partnership agreements, flow charts, and outlined processes must be adhered to. Someone needs to be in charge of ensuring these processes are followed, and staff must be appropriately trained. Regular follow-ups are necessary to confirm that the agreement and plan are correctly executed. Agreements should allow both parties enough flexibility to check in and ensure everything is being properly implemented.
EXIT PLANNING
Exit planning is a critical aspect to consider when entering into a partnership. While the goal is for the agreement to last a long time, unforeseen circumstances can arise, making it necessary to exit or transition out of the partnership. You need to think about what happens when it’s necessary to unwind or transition. How will you transition customer relationships to another bank if needed? How will you close out accounts if that becomes necessary? If there are loans or agreements with customers requiring services over a period of time, ensure provisions are in place to continue delivering those services, even if the partnership ends. Contingency planning, disaster planning, and exit planning are all crucial when starting a partnership. While unforeseen circumstances are inevitable, adequately preparing for foreseeable issues often provides enough flexibility to handle unexpected challenges appropriately.
REGULATORY RESPONSE
Finally, regulatory response is an important consideration. The financial services industry and its regulations constantly evolve, with changes occurring regularly. As a result, your partnership arrangement will need to be flexible enough to adapt to shifts in banking and financial services regulations. This may involve renegotiating or reformatting the structure of the partnership agreement. Your agreements and relationship with your fintech or bank partner should be robust enough to handle these adaptations and changes effectively as they arise.
CONCLUSION
That’s a quick summary of several key considerations and techniques that can make a bank-fintech partnership more effective and manageable. Addressing these aspects upfront will be much more efficient than scrambling to resolve issues on the fly. Proper planning will not only make the management of the partnership easier but also more profitable. It will help banks and financial services entities build and develop new products and services and launch them in a healthy and profitable way.
If you’d like to contact us, we’d be happy to speak with you—whether you have questions about getting started or an idea you’d like to discuss. We welcome all inquiries.
Farley Law specializes in working with both community banks and small businesses. If you are interested in learning more about these or any other income-generating activities for banks, please feel free to contact us at Farley Law, where we help our client financial institutions develop new products and financial services. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.