Bank-Fintech Partnership

A bank-fintech partnership is a commercial arrangement in which a licensed bank and a financial technology company combine to offer financial products. The bank supplies what only a bank can: the charter, deposit accounts, access to payment systems and, where applicable, deposit insurance. The fintech supplies the brand, the app, the customer relationship and much of the technology. To the customer the product appears to come from the fintech, while the contract for the account or loan is with the bank.

These arrangements are most developed in the United States, where a company that is not a bank cannot hold insured deposits or issue network-branded cards by itself. The bank in such an arrangement is called a sponsor bank or partner bank, and the business model is known as banking as a service.

• Deposit and account programmes. The bank holds customer funds, commonly in a pooled FBO account held for the benefit of the fintech's users, while the fintech keeps the record of each user's balance.
• Card issuing. The bank is the member of the card network and issues debit, prepaid or credit cards under BIN sponsorship, with the fintech acting as programme manager.
• Lending. The bank originates loans that the fintech markets and services, and often sells the loans or their economic interest to the fintech or to investors soon afterwards.
• Payments access. The bank originates ACH entries, wires and instant payments for the fintech's customers, or sponsors it into card acquiring.

Some banks deal with fintechs directly. Others work through an intermediary platform, sometimes called middleware, which connects many fintechs to one or more banks and may run the ledger.

For the fintech, partnering is faster and cheaper than obtaining a bank charter or a set of state money transmitter licenses, and it gives access to products that licenses of that kind do not cover. For the bank, typically a small institution or community bank, the partnership brings deposits, fee income and customers far beyond its branch area without the cost of acquiring them.

Debit card economics have been an important driver. Under the Durbin Amendment, issuers with less than 10 billion dollars in assets are exempt from the cap on debit interchange fees, so a card issued by a small partner bank earns more per transaction than one issued by a large bank. That income, shared between the bank and the fintech, has funded many consumer fintech products that charge customers no fees.

The bank cannot contract out of its legal duties. It remains responsible for compliance with the Bank Secrecy Act, sanctions rules, consumer protection law and safe and sound operation, even where the fintech performs the customer identification, monitoring and complaint handling day to day. The bank must therefore approve the fintech's policies, marketing and disclosures, test its work, and be able to see transaction and customer data.

United States banking agencies treat the fintech as a third party of the bank. Guidance issued jointly in 2023 by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency sets out expectations for managing third-party risk through planning, due diligence, contracts, monitoring and termination.

The model has grown faster than some banks' ability to oversee it. From around 2022 onward, a series of partner banks received enforcement orders citing weak anti-money laundering controls and inadequate oversight of their fintech programmes, and several reduced or exited the business.

The failure of the intermediary Synapse Financial Technologies in 2024 exposed a further weakness. When the company entered bankruptcy, its records of what each end user owned did not agree with the balances held at its partner banks, and customers of several fintech apps were unable to reach their money for months. The episode showed that pass-through deposit insurance protects users against the failure of the bank, not against the failure of a fintech or middleware company, and that it depends on accurate records of ownership. It prompted regulators to look more closely at who keeps the ledger in such programmes and how often it is reconciled to the bank's own books.

Fintechs face the mirror image of these risks. A partner bank that comes under regulatory pressure may freeze new accounts, impose new controls or end the programme, and moving customers to another bank is slow.

In the European Union and the United Kingdom, non-banks can hold customer funds and issue cards in their own right as electronic money or payment institutions, so there is less need for a sponsor. Partnerships still exist for services that require a banking license, such as lending from deposits, and for access to payment systems and safeguarding accounts. In many emerging markets, wallets and lenders partner with banks to meet local licensing rules. The wider trend of non-financial companies distributing banking products is described as embedded finance.