Bank-fintech partnerships are highly lucrative, but regulatory scrutiny is at an all-time high – which means it’s time to invest in effective and automated compliance testing.
If you’re a bank that wants to keep partnering with fintechs, then effective compliance needs to be your top priority.
Embedded finance drives revenue and deposit growth – that’s a fact. Alloy’s 2024 State of Embedded Finance Report found that over 51% of sponsor banks’ deposits and revenue come from embedded finance fintech partnerships.
Unfortunately, 80% of sponsor banks also say that meeting compliance requirements has become more challenging, due to increased regulatory scrutiny – so challenging that 29% of those banks say they were “unlikely to maintain” these partnerships going forward.
Despite regulatory headwinds, 94% of sponsor banks are or plan to invest in new compliance technology. Why? Because they recognize both the immense value fintech partnerships provide and their need for more control over their fintech partners’ compliance programs.
Fintech partnerships have been very lucrative for sponsor banks – that much is clear. However, what that relationship looks like has changed.
In a bank-fintech partnership, the bank primarily wants:
According to the Alloy report, 96% of sponsor banks want at least moderate control over their fintech partners’ compliance programs, with 57% wanting a high degree of control or complete control. The top three challenges they face are:
Banks want – no, need – more oversight of and insight into their fintech partners’ compliance programs. That lack of control was the basis for many of the recent FDIC consent orders and a main reason why the industry is moving toward a “bank-direct” model.
Traditional compliance testing methods involve dip sampling and manual review, but those can only cover a fraction of what is needed. Banks want and need increased oversight, but that doesn’t mean much if they aren’t monitoring 100% of accounts and transaction data, 24/7.
Normally, that would be a problem. Monitoring 100% of accounts and transactions around the clock usually meant a significant investment in manpower in order to manually test and review the effectiveness of their compliance controls. Obviously, that is neither sustainable nor scalable.
With Cable, banks can test 100% of their accounts and transactions, 24/7. No matter how many controls or accounts you add, you can rest assured that they will all be covered – without needing any to increase manpower – and you can be proactive in identifying and fixing any control failures before they become regulatory breaches. You’ll also have complete compliance information at your fingertips, so all stakeholders know what’s going on at any given time.
Not every fintech has the same risks, and not every sponsor bank has the same risk appetite.
Alloy found that sponsor banks typically apply one of three compliance models to their fintech partnerships:
A one-size-fits-all method rarely ever fits all and could actually be hindering growth. The increasing popularity of bank-direct relationships and the different preferences in compliance monitoring indicate that both banks and fintechs want more flexibility.
Whether you want full control over your fintech partners or want your partners to handle more of the compliance heavy lifting, Cable can help you customize your solutions while retaining consistent and efficient oversight.
To see how Cable has helped banks stay competitive without sacrificing flexibility or compliance, check out our Case Study on BankProv.
It’s not just on fintechs to woo sponsor banks – sponsor banks also need to offer scalable services and smooth user experiences in order to attract the right partners.
Banks want to work with fintechs for good reason. Fintechs are nimble and experts in their niches. More often than not, partnering with a fintech company on certain products and services, or to reach specific customer segments is much easier (and cheaper) than doing it on your own.
That’s why it’s important for sponsor banks to still give fintechs some autonomy to do what they do best, while still ensuring everyone involved is adhering to regulations.
Through the Cable platform, banks can onboard fintech partners swiftly and seamlessly, review and approve each party’s risk assessments, and align on risks and controls for each fintech program.
Cable helps banks and fintechs scale much more easily. Just signed a new partner? No problem – you can implement and test your new controls and accounts in as short as 6 weeks.
75% of sponsor banks have lost $100,000 or more due to compliance violations. So it should be telling that, despite these significant financial consequences, sponsor banks’ number one concern is reputational damage.
Noncompliance can lead to public consent orders, fines, and remediation costs, which can be quite expensive.
That being said, those are technically one-time costs – the potential damage to your reputation could lead to loss of consumer trust and loss of future partnership opportunities, which will impact your bottom line for years.
Noncompliance can also result in stricter regulatory oversight. Having to cross additional hurdles to launch new products, services, or bring on new partners could be detrimental.
Compliance is not a growth inhibitor – noncompliance is. If you know your compliance controls are working with 100% coverage, 24/7, then you can pursue new product lines and grow your business with confidence.
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