Banking Partners

Why successful fintech companies go multi-bank

Édouard Mandon
April 2023
min read

Banks are the foundations upon which successful fintech companies build their offerings. Fintech companies get access to payment schemes and networks through partner banks. It is also partner banks that hold their accounts and customer funds. 

If these foundations collapse, fintech companies can collapse too. Partnering with multiple banks is key to a fintech company’s product, resilience, and success. 

In this article, we explore the various reasons why a fintech company should consider partnering with multiple banks.

Building the best product

Not all banks have the same capabilities and offer the same financial products and services. As a fintech company, you might need to assemble multiple partner banks to deliver your product and run your operations. Bank A might hold your safeguarding account, Bank B might enable you to send and receive SEPA payments, and Bank C might enable you to send and receive SWIFT payments.

As a fintech company, being able to be effectively onboarded by multiple partner banks is key to your ability to offer the best financial products and services to your customers.

Expanding internationally

As you expand internationally, you might need to partner with new banks to give your customers access to local accounts to circumvent IBAN discrimination as well as local payment schemes for faster and cheaper payments.

Very few banks are truly global. They might only have a limited presence, capabilities, and offering outside their home markets. Truly global banks such as Citigroup, J.P. Morgan, or Barclays might be out of reach for small - to medium-size fintech companies. 

Expanding internationally might also mean complying with new, local regulations. Such regulations can include safeguarding customer funds with a local partner bank.

As a result, you might need to partner with one local bank in every country where you operate.

Building redundancy

When a bank fails, its customers are left hanging. They are unable to access their funds, receive payments from customers, pay suppliers, and make payroll. It is even worse for fintech companies. They instantly become unable to deliver their services. They might need to report it to the regulator.

It is not only about a partner bank shutting down but also a partner bank changing its commercial strategy or compliance policies (for instance, deciding to no longer serve gambling or travel companies), or changing its pricing, discontinuing a product, migrating to a new system, having a prolonged operational failure, etc.

Building redundancy means working with at least two partner banks for a given product or feature. One partner bank will serve as the main provider, while the other will serve as a fallback solution.

To achieve true redundancy, you should be able to switch smoothly from one partner bank to another, without interruption of service and degradation of the quality of service. This means having direct integrations with both partner banks and a routing solution to choose the partner bank to use for a given payment.

Improving unit economics

With an increased focus on profitability across the entire fintech industry, improving unit economics has become a priority, switching from years of growth at all costs. Fintech companies are mandated by their shareholders to capture margin everywhere possible.

Working with multiple partner banks enables fintech companies to create positive competition from their partner banks and eventually get better terms. Pricing is not only about actual account or payment fees but also higher interest rates on deposits or lower interest rates on loans.

Depending on their commercial strategies as well as their own banking infrastructure, some partner banks might be looking to attract deposits through higher interest rates, encourage outgoing payments through lower payment fees, or be more competitive than others for a given payment route (for instance, SWIFT payments).

Being able to pick and choose across partner banks and effectively allocate funds and route payments across partner banks is key to a fintech company’s ability to optimise unit economics.

What recent bank failures changed

Recent bank failures added another angle to the multi-bank strategy and deeply impacted payment companies' strategy and operations, as we discussed in a webinar about building resilient payment operations.

Assessing the counterparty risk of your partner banks

Picking the wrong partner banks can decimate your payment company’s business in minutes if such partners go down. Not days, not weeks, minutes, as stressed by our panellists. Mitigating the risk of partners going down is, therefore, paramount for payment companies.

With big names disappearing overnight in early 2023, payment companies are now way more attentive to their partner banks’ solvency, regulatory ratios, risk management and balance sheets structure. They run as thorough as possible due diligence on their partners before selecting them. 

The risk is in access to payment rails, which is obtained via partner banks for payment and electronic money institutions, but also customer deposits. First, to settle customers’ payments, payment companies need to feed a settlement account at their partner banks. The more payments you process with a bank, the more funds you need on this bank’s settlement account, and the more funds are at risk if the bank fails.

Regulated payment companies also rely on partner banks to safeguard customer deposits. Here again, adequately splitting these deposits between the right partner banks is a risk evaluation exercise and a trade-off between operational simplicity and risk.

Increasing transparency with customers

With SVB US’ failure, customers realised the hard way that fintech companies were relying on banks to hold their deposits. Major fintech companies, such as payroll company Rippling, became unable to execute payments and unlock customer deposits overnight.

During the heat of the crisis, customers with large deposits urgently contacted payment companies to figure out if their deposits were safe.

Such customers are now proactively asking how payment companies are mitigating risks before contracting, including which banks the payment companies work with, how they spread deposits, and what plans are in place if a major partner bank fails.

As discussed above, banks aren’t the only piece of the payment puzzle, and payment companies are now making sure they increase their visibility on all the systems involved in a payment to be able to clearly, and fastly inform their customers of what is happening if an issue happens, what are the impacts on their deposits, and how fast payments will be available again.

Working with partner banks has become harder

Part of what happened to SVB is due to the concentration of their portfolio in (fin)tech companies. Companies with unique cash flows (significant burn, rare and very large fund raisings), which liquidity can be impacted by macroeconomic conditions extremely fast, and that are also likely to move their deposits overnight on market rumours.

Some large banks, therefore, become wary of onboarding more of such companies, setting up stricter due diligence processes and compliance rules, or simply stopping the onboarding of fintech companies for some time while they re-evaluate their existing portfolio, overall balance sheet and risk policy.

How Numeral enables fintech companies to go multi-bank

Very few fintech companies have multiple partner banks. Even fewer fintech companies have built direct integrations with multiple partner banks. And almost no fintech company has bank-agnostic connectivity software. This means that adding or switching partner banks becomes a product and engineering project, which has to be scoped, prioritised, and delivered.

From identifying the right partner banks to getting live through onboarding, partnering with multiple banks can be long and tedious. Numeral can help with introductions as well as a single API to our network of 10+ (and counting) partner banks.

If you would like to book a consultation, please get in touch.

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