Sometimes the FinTech industry is compared to a “rocketship,” propelling itself into space with rapid innovation and user adoption. However, if the last two years in FinTech are any indication, a “rollercoaster” might be a more apt comparison: where exhilarating highs can be quickly followed by dramatic lows. 

2021 felt like one of those highs. It was a year of explosive growth for FinTech, with a record amount of VC investment being poured into the industry and new unicorns being born every other day.

Then 2022 arrived and the FinTech rollercoaster took a sharp turn. Investments slowed and stories began to emerge of the industry’s explosive growth coming at the expense of vital risk and compliance controls. 

Much of the news focused on the relationships between FinTechs and their sponsor banks. It highlighted that some of these relationships were too focused on speed to market, overlooking principles that are key to keeping the financial ecosystem secure, like regulatory compliance and risk management.

First there was the news about Blue Ridge Bank, a community bank with over $500 million in deposits specifically from their FinTech partnerships. In an agreement published in August, the Office of the Comptroller of the Currency (OCC) stated they “found unsafe or unsound practices” related to how Blue Ridge was managing their FinTech partnerships. As a result, the OCC ordered the bank to step up their FinTech risk management practices, even requiring that they obtain the OCC’s explicit “non-objection” before onboarding new FinTech partners. 

Then came the speech by Michael Hsu of the OCC where he expressed concerns about the state of the FinTech industry, and in particular Banking as a Service, saying:

“The growth of the fintech industry, of banking-as-a-service (BaaS), and of big tech forays into payments and lending is changing banking, and its risk profile, in profound ways…My strong sense is that this process, if left to its own devices, is likely to accelerate and expand until there is a severe problem or even a crisis.” 

So where does this leave us for 2023? Regulatory scrutiny isn’t going away. 

In fact, I see it increasing materially next year with the relationship between FinTechs and their sponsor banks coming under the microscope. This is a good thing. It’s important ultimately for consumers to know that the same controls, discipline and management you would expect of a bank directly apply when the bank is sponsoring a FinTech. That’s the trust we need. We want our money to be safe.

Forming “reciprocal” relationships built on trust

As someone in the business of helping FinTechs form partnerships with sponsor banks, I have an obligation to ensure these partnerships are “reciprocal” - meaning, these connections are built on a foundation of trust and collaboration in order to mutually benefit one another. 

Reciprocity is integral to forming strong partnerships in finance; it can’t be a zero-sum game, as everyone involved must work in tandem to build an amazing never-before-seen product. 

We also operate in a regulated industry - when regulators DO arrive to check on what’s happening and ensure we’re being compliant, they should see us as being able to effectively cooperate in order to form a strong defense against bad actors. 

Banking as a Service (BaaS) platforms, like Synctera, play a key role in facilitating this cooperation. The platforms not only provide the technology to connect FinTechs and banks, they also dictate the structure of the relationship and how FinTechs can or can’t communicate with their bank partners. 

In the BaaS industry today, there are two distinct approaches emerging to how bank and FinTech relationships are structured: The middleman approach and the connection approach.

1. The middleman approach: The BaaS provider acts as a middleman between the FinTech and their sponsor bank. All communication between the FinTech and their sponsor bank goes through the BaaS provider, who shields the two parties from forming a relationship with each other. 
2. The connection approach: The BaaS provider connects the FinTech and their sponsor bank directly with each other. The two parties are able to communicate, build trust and form relationships. 

The middleman approach - while perhaps appealing at first to FinTechs because they only have to communicate with the BaaS provider - makes building a collaborative relationship with your sponsor bank infinitely more difficult. 

Why does this matter?

When regulators evaluate the relationship between the FinTech and sponsor bank they are going to want to see that the banks have a crystal clear view into the FinTech’s current business and risk potential.

A FinTech’s business plan, executive backgrounds, and policy and procedure documents will provide the sponsor banks a lot of the insights they’ll need to perform proper oversight. But without being able to see the human on the other side of the FinTech partnership and hear the product vision from their perspective, there will always be one crucial piece missing: a relationship built on trust and collaboration. 

FinTech and banks need to have this type of relationship because things can change rapidly. A FinTech may want to launch new products or features, their customer base could evolve, market dynamics might shift, and new regulations may arise. Without a collaborative relationship, misalignment and miscommunication can begin to happen over time. 

Avoiding a bad game of “telephone”

As we’ve all probably experienced from playing the game “telephone” as kids, it can be quite easy for key points to get lost in translation when communication is filtered through a chain of different people.

The same holds true for managing important relationships between a bank and a FinTech.

Not being able to directly communicate with one another makes the collaboration process much more challenging. The intermediary may not have all of the context or understand the inner workings of either the bank’s or FinTech’s product, tech stack and risk dynamics, creating inefficiencies when everyone is working to identify problems or solutions.   

When things go wrong, the FinTech <> sponsor bank relationship becomes even more critical. Everyone in the industry - even regulators - understand that things don’t operate perfectly in financial services. What really matters is how people come together to solve the problem and prevent it from happening in the future. Regulators are going to want to see that banks and FinTechs have a clear process and can effectively collaborate together to fix problems when they arise.

I am a firm believer that forming strong, personal relationships in business will almost always yield better outcomes, both in good times and bad. For the BaaS and FinTech industry to thrive, the FinTech and sponsor bank partnership needs to be treated less like a transaction, and more like a “reciprocal” relationship between partners. 

Increased attention from regulators in the years ahead is a natural progression for the FinTech industry. The best FinTechs will see compliance as a moat to defend their innovation and build ever more trust with their consumers, partners and the ecosystem at large. As long as the industry sits on a strong foundation of relationships built on trust and collaboration, this scrutiny will result in stronger partnerships and a more secure financial system for all.