Three ways for banks to partner with tech companies

For community banks, a digital strategy is no longer optional

Today, many banking leaders are investing in digital channels as a way to build customer relationships beyond the communities they’ve traditionally served.

The reason is twofold: First, traditional customer bases are changing. Second, customers (both businesses and consumers) increasingly expect to get their financial services online.

According to research by the Motley Fool, 91% of US banking customers say that digital banking is an important factor when choosing where to bank—on par with security and customer service. This is especially true for Gen Z; more than half of people in this age group say they’re dissatisfied with their current bank and ready to switch.

For community banks that want to remain relevant, the implication is clear: a digital strategy is no longer optional. Today’s banking customers expect instant access to their money and a world-class digital user experience. Many of them also expect to access financial services inside the apps and websites they already use—a practice commonly referred to as embedded finance or banking-as-a-service.

If you’re a banking leader who’s thinking about whether and how to partner with fintechs, this guide is for you. In it, we’ll discuss:

• What are the three ways to partner with fintechs?
• How do they vary in terms of complexity and time to market?
• What does it take to launch?

Embedded finance is a proven way for community banks to grow

Embedded finance is when banks partner with tech companies to offer financial products inside the tech company’s app or website, often using the tech company’s branding.

As an example, let’s take Thread Bank and Highbeam. Thread Bank is a community bank based outside of Nashville, Tennessee. Highbeam is a platform that helps ecommerce store owners access the financing they need to grow.

In 2023, Thread partnered with Highbeam to to offer business bank accounts and charge cards through the Highbeam app. The partnership has been a huge success for Thread, Highbeam, and their shared customers.

• For Thread Bank, the partnership has generated thousands of new customers and tens of millions of dollars in deposits.

• For Highbeam, the partnership with Thread has set them apart from their competitors, driving new-customer acquisition, retention, and monetization.

• For their shared customers, these embedded financial products have been a game-changer, enabling them to smooth uneven cash flow and take control of their finances.

The three ways for banks to partner with fintechs

The question of how to partner with fintechs can be a challenging one for many banking leaders.

Too often, the goal of growing revenues through innovative technology partnerships  may feel at odds with the delivery of safe, reliable financial products. This does not have to be the case.

At the most basic level, there are three ways to build a fintech portfolio:

1. Build from scratch. In this model, you build and maintain a technology stack to support your digital banking experience on top of your existing core. This will include building things like a digital ledger, a statement generation engine, and a suite of application programming interface (API) tools that your customers will use to interact with your banking products. In addition to the high technology lift, you will also need to scale up your compliance team to ensure you maintain proper oversight for each of the separate programs you serve.

2. Use a core wrapper. In this model, you partner with a technology vendor that provides and maintains most of the technical components (e.g., APIs and software tools) that your fintech clients use to interact with your banking products. This reduces the technical lift for your team but introduces new challenges of selling your combined service to tech companies and communicating to them the benefits of a tech stack you don’t fully own. In addition, you will still have to build and maintain separate oversight programs for each of your fintech clients.

3. Partner with a platform. In this model, you partner with a financial infrastructure platform (like Unit) that provides and maintains the full tech stack needed to serve tech companies. That includes APIs, software tools, technical guides, and developer support. The platform also provides a unified dashboard and operational controls to help the bank enforce its compliance and oversight requirements across its entire fintech portfolio. As a result, implementation is much easier, and it’s more efficient to manage your program on an ongoing basis.

Option 1: Build from scratch

Under this model, the community bank chooses to work with fintech clients without using a core wrapper or a financial infrastructure platform.

It’s the route taken by many early movers in the fintech space—for the simple reason that, back then, there weren’t any other options. Coastal Community Bank and Stride Bank are two well-known examples.

Many early movers in the fintech space chose to build from scratch—for the simple reason that, back then, there weren’t any other options.

If you choose this approach, you’ll need to build an entire technology stack on top of your existing core (the antiquated technology of the core, itself, will often limit the features and functionalities you can offer). That starts with an application programming interface (API) that tech companies can code against. They’ll use your API to interact with your banking products. 

You’ll also need to build and maintain technology for things like:

• Ledgering
• Card issuing
• Transaction processing
• Statement generation
• Information security
• Underwriting

This list is far from exhaustive, but it gives you some idea of the complexity involved. In addition, you’ll need to build and maintain separate oversight programs for each of your fintech clients. (We’ll explore what that entails in the next section “Use a core wrapper.”)

If you’re considering this approach, you’ll need to hire and manage a large Product and Engineering Team, as well as a large Compliance Oversight Team. Maintaining and continuing to build out your fintech stack will require a substantial investment of staff time on an ongoing basis. Finally, you’ll need to plan for redundancy and distributed knowledge in case key personnel leave the bank. 

Because of the complexity involved, you should plan to go live in 2–3 years.

Option 2: Use a core wrapper

Under this model, the community bank uses a core wrapper to partner with tech companies.

A core wrapper is just what it sounds like: a technology layer that “wraps” your legacy core system, enabling your fintech clients to code against it. Another way of saying this is that a core wrapper provides an application programming interface (API) that your fintech clients will use to interact with your banking products on an ongoing basis.

If you’re considering this approach, plan to hire a large Compliance Oversight Team—one that will grow linearly with the number of fintech clients.

The challenge with a core wrapper is that you’re limited by the legacy core you’re using (e.g., FIS, FiServ) and the way it operates: the types of data you can collect and transmit, the inefficient operational tools. Even with more modern core wrappers, there’s a limit to how much you can optimize. Plus, core wrappers don’t help with compliance oversight, so you won’t be able to work with tech companies that aren’t willing to build out and manage their own compliance programs.

If you choose this approach, your team will still need to be trained on a variety of different systems and learn the unique attributes of each tech company you support in order to properly oversee them. That means, for each of your fintech clients, you’ll have to learn separate tools and processes for each of their programs, including for:

1. KYC/KYB
2. Reconciliation
3. Dispute handling
4. Customer service
5. Payment processing
6. Statement generation
7. Transaction monitoring, etc.

If you’re considering this approach, you’ll likely need to hire a significant number of new compliance and oversight professionals. You should assume your fintech oversight team will increase linearly with each fintech client you add. Attempting to manage separate oversight programs for each of your fintech clients will also greatly increase your third- and fourth-party risk. As a result, this approach will seriously limit the number of fintech clients you can support.

It’s worth noting that some legacy infrastructure providers claim to have built their own wrappers; i.e., they provide a technology layer on top of their banking cores. But we recommend investigating these claims before you get too far down the track. Based on our experience, engineers at leading tech companies prefer more modern tools.

If you choose this approach, plan to launch your first embedded financial products in 12-18 months.

Option 3: Partner with a platform

Under this model, the community bank uses a financial infrastructure platform (like Unit) to build direct, ongoing relationships with tech companies.

Think of it as an operating system banks use to manage their fintech portfolios. A financial infrastructure platform provides the bank with both the technology layer (APIs) and a single dashboard through which to oversee all of their fintech clients. That includes real-time data and visibility into every program and end-customer. The platform also ensures that all fintech clients are using the same, approved third-party vendors for things like KYC/KYB and card issuing.

In many cases, your financial infrastructure platform will introduce you to potential fintech clients—something core wrappers don’t do.

Because so many oversight functions are streamlined in the dashboard, the unique “surface area” that banks will need to oversee for each of their fintech clients is drastically reduced. Outside of the dashboard, banks will need to focus on overseeing three things for each of their fintech clients.

1. Information security
2. Marketing materials (including website)
3. Servicing and support for end-customers

Banks that partner with a financial infrastructure platform typically realize efficiencies of scale. Most bank compliance teams responsible for fintech oversight do not need to grow linearly with the number of fintech clients. And because the platform includes an ever-evolving set of bank-approved, third-party vendors for the tech companies to choose from if they need a new feature (e.g., Astra for instant account funding), a platform approach helps to mitigate the bank’s third- and fourth-party risk.

The platform approach empowers banks to focus on their core competencies: delivering excellent financial products, managing risk, and ensuring compliance. In many cases, your financial infrastructure platform will also introduce you to potential fintech clients—something core wrappers don’t do.

If you choose this approach, plan to launch your first embedded financial products in 4-5 months.

What does it take to launch?

Unit is a financial infrastructure platform. That means we help community banks identify and partner with promising tech companies.

To date, we’ve been trusted by eight community banks and nearly 200 leading tech companies. Together, we’ve helped our bank partners:

• Onboard more than 1.4 million new customers
• Increase deposits by over $1 billion
• Generate more than $28 billion in transactions per year

Thanks to our unified oversight dashboard and our White-Label App, our bank partners are typically able to launch their fintech programs in six months or less. White-Label App is a standardized user-interface that end-customers see when they interact with their banking products.

If you’re thinking about the best way to launch your fintech program, we’d love to chat. Reach out to banks@unit.co.

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