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Sponsor Banks 101: How Do They Work?
Bank partnerships are integral for fintechs that want to launch new and innovative products and solutions. Missteps in finding a sponsor bank can lead to launch delays, onboarding snafus, product roadmap changes, and poor customer experience.
Finding the right sponsor bank requires an understanding of the role the bank plays, what the relationship looks like, and considerations for choosing the right partner. This article outlines key information about sponsor banks and how to evaluate potential partners.
Sponsor banks are state or federal chartered banks that partner with fintechs so they can offer financial services and products. A sponsor bank is also a member of the card associations (like Visa or Mastercard), so it can enable non-financial entities to offer credit cards. The job of a sponsor bank is to facilitate the movement of money and provide compliance oversight for fintechs.
Sponsor banks carefully vet fintech partners since they are responsible for ensuring that each fintech is compliant – and ultimately, they assume the risk for each of the fintech’s transactions and customers.
For fintechs offering credit cards, sponsor banks – often referred to as BIN (banking identification number) sponsors – provide fintech clients with BINs. A BIN includes the first numbers on a credit card that identify the institution that issued it. This type of partnership enables fast go-to-market for businesses that want a simpler, cost-effective way to launch credit cards.
There are a couple of ways in which a fintech may partner with a sponsor bank:
Operationally mature fintechs may choose a direct bank partnership. The fintech integrates directly with the bank, allowing greater control over a credit card program. Managing the relationship with the bank directly means more complex operational and compliance processes and often requires more in-house resources. This approach may be ideal for companies that want to serve as their own program manager and only need licensing and money movement capabilities from a banking partner.
Fintechs that want a direct bank relationship will have to negotiate contract terms – including contract length, pricing models (interchange take rate, account per month, etc.), exclusivity, reserves, and fees – and pass a thorough due diligence process.
Fintechs that may not have the resources to manage a direct bank relationship or are optimizing for speed to market can opt to partner with a card issuing platform and leverage its bank integrations and relationships. In this scenario, the platform acts as the program manager, offering less control over the bank relationship but requiring far fewer resources. Many fintechs choose this type of partnership to get started.
Fintechs must do their due diligence in choosing a sponsor bank. Switching bank partners is a time-intensive, complicated, and expensive process. To avoid this scenario, many fintechs opt to work with card-issuing platforms that have existing relationships with sponsor banks.
Fintechs working directly with sponsor banks should do their homework to avoid making costly mistakes. Each sponsor bank has different capabilities and some have a specialized focus. Fintechs should evaluate banks according to their strengths, weaknesses, processes, and preference for fintechs. Consider the following criteria when choosing a sponsor bank partner:
Experience – Look for a bank partner experienced in the financial products you’re launching.
Location – Regulatory requirements and banking laws may impact how banks in various locations can support your product. State regulations around escheatment and fees may vary, and bank representatives may also need to visit your physical location to review your business.
Risk Appetite – Banks may have regulatory concerns or outright policies against working with certain industries deemed high risk, including crypto, cannabis, gambling, and others.
Compatibility – Fintechs should find compatible bank partners by understanding how they evaluate risk and underwrite programs. The enhanced scrutiny from regulators that fintechs receive is shared by their bank partners, so some may not be willing to support certain capabilities or offerings.
Innovation Factor – To expand on the compatibility point, some banks may not have a track record of working with modern program structures. For fintechs that aim to innovate new use cases, it’s important to find a bank partner that can work collaboratively to create compliant frameworks.
While a direct relationship with a sponsor bank can pave the way for fintechs to offer innovative new products, they can be a heavy burden in terms of time, money, and staff. Partnering with program managers that have pre-existing relationships with banks allows fintechs to use fewer resources, though they may have less control over the program.
That said, working with a program manager that brings sponsor banks to the table as part of the offering can be beneficial for organizations. This type of engagement can speed up time to market, reduce legal fees, and lower the number of resources needed for compliance. Fintechs also get the benefit of the program manager’s expert knowledge in terms of which sponsor bank is the best fit. There is no right or wrong answer but only the best path forward for each fintech, depending on its unique situation and product offering.
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