How to select a bank partner?
A primer on how to choose a bank partner.
“If this is how they are when you are dating, imagine how they will be once you are married.”
These are a handful of dimensions to look at when chosing a bank partner to launch a new product:
Table of Contents
- Regulatory Concerns
- Work Cadence
Choosing a Bank Partner
Depending upon the product offering, the physical location of a bank partner can highly influence their ability to support your product. For example, when issuing credit products, some banks are beholden to their state regulations that may treat fees in an non-exacting way.
For credit, the typical states to issue out of are: Utah, Deleware and South Dakota. There are a few others that work relatively well, and some that one must avoid, such as New York.
In choosing a bank, one of the biggest concerns is in making sure that bank has experience issuing the product your are planning on launching. If they have not previosuly brought that product to market, you will likely have to spend more effort than would otherwise be necessary getting them prepped to launch and ensuring they understand all the nuances about your product type.
It is an open secret that fintech companies have run into issues when their partner banks get dinged for regulatory issues, for their program or any other program the bank is running. When this happens, it can stall growth and ability to make any meaningful product changes. Therefore, when looking at a partner bank, one should also evaluate their regulatory risk based upon how they underwrite programs
One of the most important concepts when choosing a bank partner, if you have a choice, is the speed at whcih you’re able to iterate with them. Since the bank is technically the issuer of the product and you will just be the marketer and maybe program manager,
When partnering with a bank, there are a few models for how it will look. It can be a revenue share, pay per use pricing, or some mashup of those two.
At the time of writing this, there are 4 major considerations for the contract: Length, Pricing, Minimums and Reserves. In addition to those major costs, there are additional fees includign setup fees, diligence fees,
Term length for the contract will vary between 1 year up to in rare cases 5 years, with 2 to 3 years being the standard.
Pricing models for banking contracts can be based off of a bunch of different metrics. The simplest ones will either be per account per month, or a take rate on the aggregate interchange.
Some pricing will be dependent on the amount of deposits orignated for the bank, where the bank actually pays you to orignate deposits for them, and charges you nothing else, but those are rare and require a product with minimal operational overhead for the bank.
Negotiating with a bank can take in the best cases weeks and in the worst case many months. Beyond the contracting items above, there are a bunch of considerations, tricks and tips to make the process go as smoothly as possible. The main one we’d recommend is pre-paying all bank diligence fees at the same time to get them to start the evaluation and process of working together as quickly as possible. This has a few advantages, one it aligns all the banks timelines, so when you are answering diligence requests you likely already have the answer fresh. Additionally, as you approach end of diligence you should should be finishing negotiating pricing terms of your contract, and can play the banks off of each other to get better pricing or additional considerations (lines of credit, reduced minimums, signing credits, etc). The other main one is that you get to learn what its like to work with your potential bank partners ahead of picking a winner, and see who has the most work capacity for your partnership, and can move quickest.
Other things to consider that do not fit into the other sections include: network relationships, service level agreements (SLAs), and regulatory cycles.