Clifford Chance

A recent spate of enforcement actions against sponsor / partner banks and heightened regulatory scrutiny of the bank-fintech partnerships underpinning banking-as-a-service (BaaS) and embedded finance products pose challenges in 2024 and beyond.

As part of our recent International Festival of Fintech Katie Cragg and Jerry Lee from Stripe joined us to consider the ever-evolving landscape for banking and payments services in the United States, and the commercial and contractual keys for a successful bank-fintech partnership.

Some of our key takeaways include:

• Importance of trust: Trust between fintechs and banks is paramount, with both parties relying on each other to maintain high standards of risk and compliance controls. 
• Bank-fintech relationship: The relationship between banks and fintechs is complex, with roles as service providers and recipients often overlapping. Banks provide necessary network access and financial services, while fintechs offer banks increased transaction volumes and access to new customer bases. 
• Regulatory scrutiny and enforcement: There has been an increase in regulatory scrutiny and enforcement actions targeting bank-fintech partnerships. This scrutiny is leading to changes in risk appetite among banks and may have a chilling effect on new fintech entrants due to the perceived burden.  Banks are increasingly imposing heightened compliance expectations on their fintech partners, including increased requests for new types of information. For those fintechs operating in the issuer processing or merchant acquiring business, card networks may also need to impose additional requirements.
• Contractual and operational alignment: Early alignment on service level agreements, risk and compliance expectations, and clear delineation of roles and responsibilities is crucial for successful partnerships. This alignment helps protect all parties, including the end-users, from potential regulatory impacts. 
• Innovation amidst regulation: Despite regulatory challenges, there are opportunities for innovation. For example, fintechs can offer sophisticated fraud detection tools that benefit the entire payment ecosystem. Regulatory changes in some jurisdictions are also enabling fintechs to access networks directly, reducing reliance on bank sponsors. 
• Market trends and future outlook: The market for bank-fintech partnerships is evolving, with larger banks entering the space and offering more stability. Fintechs are exploring creative licensing solutions to reduce reliance on bank partners. While the number of bank partnerships may remain stable, the nature of these partnerships will continue to evolve. 
• Shifts in value propositions and competitive landscape: As fintechs become more regulated, the initial value proposition of bank-fintech partnerships is changing. Fintechs are building their own strong risk and compliance foundations, which may alter the dynamics of these partnerships moving forward, with fintechs sometimes acting as both competitors and partners to traditional banks. This dual role is influencing how partnerships are formed and how both banks and fintechs approach the market. 

Speakers:

• Katie Cragg, Global Head of Partnerships Legal, Stripe
• Jerry Lee, Global Head of Risk Legal, Stripe
• Young Kim, Counsel, Clifford Chance
• Vipul Nishawala, Partner, Clifford Chance