So you’re starting a fintech
Here are some common questions and answers we run into. In order to limit the verboseness of our content, bank can mean credit union or bank.
Bank Partnership
Q: Do I need a bank partner?
A: If you want to do banking stuff i.e. - lending, holding money, facilitating payments - then the answer is probably yes.
Q: How do I find a bank partner?
A: There are lots of good bank partners, but each bank typically specializes in some way. For example, banks often specialize in consumer vs. business banking. Keep in mind that because of the Durbin legislation, financial institutions below $10 billion typically have better unit economics for FinTechs, and can be more agile than the larger players. Feel free to checkout our resources page for a list of great partner banks.
Also, we HIGHLY recommend that you don’t paint yourself into a corner with your partner bank. Make sure your relationship is not exclusive. While we hope the relationship is incredible forever, you don’t want your company to be at the mercy of a partner bank that has different plans than you. They can cut you off tomorrow if they want to. Try to begin with the end in mind by courting at least two potential partner banks.
Q: What will a bank partner require of me?
A: Each bank partner handles this differently, but remember, that most banks want to see that you’ve taken significant steps to secure customer data. The bank you partner with has a lot at stake, so be understanding. If you get hacked, it could be a big hit for their brand, since your customers will often be signing up with them as part of the process.
Security - There are several standards, such as SOC 1 or SOC 2, that help bank partners know you’re serious about security. Either you, or the technology you use, will likely need to be SOC 2 type II compliant in order for a bank to be willing to work with you. If you have questions about that, feel free to reach out to us.
Compliance - Banks are heavily regulated. For most FinTech partnerships, banks keep a tight reign on the FinTech by forcing them to get sign off from the bank anytime marketing content is generated, a page on the website gets changed, verbiage in the app changes, or a new product is released. While frustrating for many FinTechs, this is pretty standard, so be sure to understand the banks process for handling these sorts of changes ahead of time.
Compelling business idea - We’ve been on too many calls with FinTechs that really struggle to sell their vision to the bank they’re trying to partner with. Consider running your idea past other people in the space and requesting feedback to improve it. In speaking to a partner bank you have to sell them on you and your company!
Q: How do I know if the bank would be a good partner for us?
A: First off, spend time getting to know key players at the bank, in-person, and feel free to reference check. Consider checking their financial statements that are often posted online. Check to see if they’re a healthy financial institution. This is a big relationship for your company. Don’t take it lightly. If we were in your shoes, we’d ask the bank questions like these:
Have you partnered with other FinTechs before? Can we ask them how their experience has been?
What sort of technology do you recommend using?
What sort of process do you have around approving changes we make to our application, marketing, or website content?
Fast-forward 12 months. Pretend we’ve been super successful. What do you feel that success would mean for our relationship? The same question, asked in a negative light can also be helpful.
Would you want to handle all of the future financial products we have in our roadmap, or just some of them?
If we’re wildly successful, could you handle our account growing to XX millions of deposits in 12 months?
revenue models
Q: What are the common revenue models I can tap into?
A: There are lots of ways to make money in Financial Services. Here are a few of them:
Lending - Banks make money by lending it out. Many of the top FinTechs I know have a lending component of some kind.
Interchange - This revenue is generated when a card, issued by the bank, is used to pay for a transaction. The Durbin amendment impacts how much interchange can be made on these cards. Consumer cards - debit or credit - make less interchange than business cards. Expect financial institutions to be willing to share interchange when approaching them about a partnership.
Interest income - When you, as a consumer, store money with a bank they offer you interest. When you, as a Fintech, bring money to a bank, expect similar treatment. You should be able to negotiate some interest, but don’t expect it to have a significant impact on your revenue unless you’re storing huge amounts of cash. Remember, interest rates typically fall in the range of 1-2% on the high side.