Strategic partnerships are on the rise in the payments and fintech space. In recent weeks we have seen traditional banks team up with technology and fintech companies to bring buy now pay later (BNPL) offerings to the market.
Partnerships themselves are not a new phenomenon in the payments sphere. For years banks providing merchant services have teamed up with acquirers to provide them with acquiring infrastructure. Acquirers have entered into partnerships with independent sales
organisations and payment facilitators to bring them greater merchants volumes. However, high profile, strategic partnerships with the intention of creating a new product, accessing different customer demographics or overhauling legacy systems seem to be the
direction of travel.
This article explores the drivers of these initiatives, examples of how they can be structured and regulatory considerations to have on the radar.
Drivers
Strategic partnerships can benefit banks, payment systems and fintechs in variety of ways depending on what the parties want out of their relationship. Examples of common key drivers include:
- Increasing the demographic reach of a product where a partnership will unlock new customer segments for one or both parties.
- Enabling one or both parties to leverage the brand of the other. This is particularly useful for smaller fintechs who have a shorter track record and will derive value from being associated with a trusted brand.
- Leveraging the regulatory status and / or expertise of a party. Where parties involve consumer credit, insurance and / or payment services the likelihood is that at least one party will need to be regulated. The other party may need to team up with a partner
that has the requisite regulatory licences to offer a product. If a party has good relationships with local regulators this is also a valuable factor that can be brought to the table.
- Increasing a bank’s or payment system’s product offering without the operational uplift of building a proprietary product. For example, banks may partner with fintechs that offer a treasury payments platform which sits on top of bank accounts and provides
customers with additional services.
- Improving existing core banking systems through the use of a fintech software solution.
- Providing access to capital when venture capital is less freely available.
Structures
There is no one way to structure a partnership and the details of each arrangement will be bespoke. However, the models below are overarching structures that frequently arise in the payments and fintech space:
- A formalised referral structure where typically banks or payment systems refer customers to their fintech partners. This enables banks / payment systems to maintain a competitive offering with value-add services without building additional products or infrastructure
themselves.
- A ‘joint offering’ model whereby products from different service providers are offered through one application to enhance the customer experience and to boost cross-selling.
- A white-labelling structure. For example, banks may purchase fintech products and offer them under their own brand. This reduces the potential friction introduced into the customer experience through the referral model. Alternatively, fintechs might partner
with other fintechs (such as e-money issuers and licenced consumer credit firms) to help them provide a payment services and credit offering.
- An integration structure. For example, banks may purchase credit assessment tools provided by fintechs and use them as part of credit assessments. Banks may also use fintech vendors to undertake functions ordinarily performed by a bank. Core banking services
are on the rise whereby fintechs provide software solutions that manage operations including account ledgering, transaction processing and loan management.
- Acquisition and integration. Acquisition is a common route particularly where there is a concern that a competitor might acquire a new fintech solution and speed to market become a priority.
Regulatory considerations
Regulatory considerations and alignment can be an important hurdle at the start of a partnership. Issues relating to a partner’s regulatory track record, determining whether additional regulatory licences are required (and obtaining them) and protracted
negotiations over outsourcing agreements can all prove stumbling blocks. In addition to due diligencing a partner’s compliance record, the following questions are also worth keeping in mind:
- Licences: Who in the partnership is providing the regulated services and do they have the right licences/authorisations to do so?
- Consumer protection: If consumers are involved, how will the UK FCA Consumer Duty apply to each party and is the product offering compliant with consumer legislation in general (e.g. unfair commercial practices)? For example, are the parties co-manufacturers
or is the relationship one of a manufacturer and distributor?
- Marketing: Will the partnership involve a party making financial promotions? If so, are they an authorised firm, can the promotions be approved or is an exemption available?
- Agency: Will one of the parties be deemed to act as an intermediary or agent that could trigger an (additional) authorisation requirement?
- Outsourcing: Does the partnership involve an outsourcing and is there an outsourcing agreement in place which complies with the applicable rules (e.g. EBA outsourcing requirements in the EU or the FCA/PRA rules in the UK)?
- Business continuity: Is the partnership adequately mapped into regulated parties’ operational resilience programmes (e.g. in view of the EU DORA regime)?
- T&Cs: Do customer terms and conditions need to be updated so they are tripartite?
- AML: Who is responsible for KYC? Will KYC be outsourced or relied upon in a manner that is compliant with the applicable money laundering regulations (e.g. AMLD or the UK Money Laundering Regulations)?
- Critical services: If a fintech provides material services to a number of banks could it be designated as a critical third party under the EU DORA regime or the corresponding UK regime?
Regulatory considerations are just one piece of a huge project that also involves data, employment, corporate, competition and contractual considerations but they are important to get right.