Outside of the largest banks like JPMorgan Chase, most traditional US financial institutions use outside core and card processing providers. Banks, outside the few largest, have neither the budget nor the interest in building software. With more than 8,000 financial institutions (banks and credit unions), many providers have found lucrative opportunities to build bank software.
Services and products are different for sponsor banks. My firm tracks more than 100 U.S. sponsor banks that offer loan, account, and card sponsorship to non-banks that offer direct services. Over the past 20 years of fintech evolution, the end programs have selected a sponsor bank and an issuer processor or core platform separately. Some sponsor banks have a single or preferred partners, while others are open to all qualified technology platforms.
Recently, however, we are seeing a major shift: sponsor banks offering their own platforms. The first inklings of this came during the fintech boom, when sponsor banks like The Bank of Missouri and Evolve Bank & Trust partnered with legacy provider i2c to offer direct API access. Neither effort has shown much progress, and the space has gone a bit quiet.
It’s a Process
Last year, Cross River Bank, one of the largest fintech sponsor banks, announced an in-house card processing platform. The bank still supports third-party issuing platforms, but now competes with them.
In September, Column Bank, another leading fintech sponsor bank, also announced an in-house full-stack card issuing platform. In July, FinWise Bank acquired a card program management partner, Tallied, that offered processing, bringing end-to-end card processing in-house.
From the other direction, Increase, a modern core that previously partnered with several sponsor banks, announced the creation of Increase Bank, which is controlled by its founder, Darragh Buckley. While Increase Bank and Increase Technologies appear at separate entities, they are controlled by the same founder. Neobank Chime, which built an in-house platform for card processing, recently announced an agreement to acquire one of its sponsor banks, Stride, bringing everything under one roof.
I also expect some of the de novo fintech banks announced in the past year, and larger fintech brands, to continue building technology internally, creating additional full-stack providers. The trend is clear: we’re vertically integrating.
For smaller fintech companies or potential customers of these processors and sponsor banks, there are advantages and drawbacks. On the positive side, a single partner creates better alignment on requirements, reduces the fintech brand's need to coordinate reporting and integration, and reduces compliance work. On the negative side, banks, including fintech sponsors, are not known for fast decision-making, and a Fintech is signing up for a single, potentially slower partner.
For processors, a new risk emerges: a partner bank may start stealing market share with an in-house offering. In off-the-record conversations, these sponsor banks assure me they would never try to flip a referral. I have seen those attempts already for a sponsor bank to induce a client to shift processing from a third party to its in-house processor.
Very few activities at a sponsor bank require APIs and platforms. For card issuance in particular, the sponsor bank leads compliance and settlement, but may have no real-time requirements. The bank can delegate real-time integrations to the processor and the fintech.
New sponsor banks, founded or managed by folks from the tech side of the industry, tend to want to build software and APIs. These capabilities can serve as a point of differentiation and attract modern customers. Traditional sponsor banks are unlikely to build complex in-house processing stacks and will stake a claim to partnering with independent processors where there is no risk of competitive pressure between the bank and the processor.
I do not subscribe to the belief that there is a “right” way to provide these services. The fintech market is expansive, and there will be customers for both types of banks: those with in-house processing and those without. Whether you are a fintech partnering with a bank (and therefore want many capabilities of your own), or a vertical SaaS platform looking to embed certain fintech services (and therefore want something as turnkey as possible) will affect what the ideal platform is for you.
Photo by Florian Olivo on Unsplash
One thing I recommend banks don’t do is to wrap a third party and pretend it's their own platform. Whether you build it (Column) or buy it (FinWise, CRB), banks shouldn’t become middleware that doesn’t add value.
I remain unconvinced, however, that sponsor banks can easily play both parts of the equation: sell their own services and partner with processors. I think the friction will be meaningful, despite best efforts on all sides. I also suspect that banks, as highly regulated organizations fundamentally focused on risk management, will be unable to maintain the innovation and speed of external processing platforms. Time will tell: I would love to be proven wrong.
(Matthew Goldman is a regular contributor to TWIF and is the founder of Goldman Socks, the world’s punniest banking sock company. (He’s also the founder of Totavi, a boutique fintech product & marketing consulting firm, and the publisher of CardsFTW & ProductFTW.)
