Introducing “Banking Matters”

Today we’re launching a new series called “Banking Matters.”

It’s written for banks and the companies that want to work with them. The goal is to share knowledge and best practices about how to build a compliant, scalable digital financial services ecosystem.

Financial services is changing. Twenty years ago, banking and lending were conducted primarily inside big, brick buildings. Today, these activities are rapidly becoming digital, with customers often accessing them through their mobile phones and laptops. As we move forward, financial products like bank accounts, wallets, and payment cards will increasingly be available inside the apps and websites (e.g., Apple, Uber, Shopify) people already use.

“Achieving the right mix of safety and impact, oversight and opportunity is a critical initiative that will require sustained hard work and collaboration from a variety of important stakeholders.”

It’s an important moment in the history of financial services, with both tremendous promise and its share of new challenges. On one hand, the continued evolution toward digital-first delivery has the potential to expand financial access, enable more tailored products to be accessed in more convenient ways, and open new markets.

On the other hand, banks must ensure that customers’ money and data are safe—and that the products they offer through digital channels meet their typical high standards. 

Achieving the right mix of safety and impact, oversight and opportunity is a critical initiative that will require sustained hard work and collaboration from a variety of important stakeholders: banks, their service providers, their program partners, consumer- and small-business advocates, and policymakers. 

The relationships between banks and their program partners

In our first post, we’d like to address the linchpin of much of the financial-services innovation over the last two decades: the relationship between banks and the program partners they work with to access new digital channels. 

Businesses and consumers increasingly expect to be able to access financial services through the digital platforms they currently use. Banks are meeting this customer need by entering into relationships with platform partners to make the bank’s products available to the platform’s users. For example, a bank may partner with a ride-sharing company to offer debit cards to drivers on the company’s app. 

These kinds of relationships go by different names, but, for the purposes of this post, we’ll use the term “embedded finance.” Bringing these relationships to life typically involves contributions from a variety of different parties, for example: 

1. Technology services providers. The bank may use a technology services provider (like Unit) to facilitate the connectivity with the program partner and the ledgering of transactions. 

2. External compliance solutions. The bank may also use external compliance solutions to perform services like verifying customer identification and conducting OFAC screening. 

3. Card networks and processors. If the program includes payment cards, then there will be a processor and card network involved. 

4. Third-party vendors. The program partner itself will likely use its own vendors for certain functions, such as customer service or marketing. 

At the center of this constellation is the bank. As a chartered financial institution, the bank is responsible for ensuring that the financial products it offers are compliant with relevant laws and regulations—no matter how the products are distributed. 

This means the bank needs to have sufficient oversight and control over the various elements that together comprise the bank’s program.

How responsibilities shape relationship structure

For banks exploring embedded-finance relationships, a fundamental question is how to structure your relationships with the partners on whose platforms you would offer your banking services. 

The answer to that question depends in large part on the responsibilities that the program partner is taking on in connection with the program. In many embedded-finance relationships, the third-party partner retains meaningful responsibilities, such as:

• Building and maintaining the user interface. This refers to the buttons, screens, and words that end-customers see when they’re interacting with the bank’s financial products.

• Providing customer service. End-customers are often instructed to contact the program partner when they have a question or feedback about the financial products.

• Providing disclosures and obtaining authorizations. The program partner is often responsible for hosting the necessary disclosures and obtaining the required authorizations related to the bank’s financial products.

• Performing compliance-related functions. The program partner may have agreed contractually to perform certain compliance-related functions, such as customer identification or transaction monitoring. 

• Developing marketing materials. The program partner often designs and distributes marketing materials, including landing pages, emails, digital ads, and social media.

If the program partner has material responsibilities such as these that are critical to the proper and compliant functioning of the program, then it will likely be important for the bank to establish and maintain a direct contractual relationship that gives the bank the necessary visibility and control over the program. 

Unit’s approach to bank relationships

Unit is a technology and managed-services provider to banks. We enable banks to access new digital channels under their own brands and through relationships with third-party program partners. 

The Unit platform provides the operating system–including ledgering, oversight dashboard, reporting, and data access–that helps banks launch and manage digital banking programs. Unit’s API provides powerful building blocks that enable banks and their program partners to design banking programs that will be offered to customers via the program partner’s digital platform. 

Since launching Unit, all relationships between banks that use the Unit platform and their program partners have been direct. Here’s what that means:

1. Banks contract directly with their program partners. At the core of every relationship is a direct agreement between the bank and its program partner, providing the bank with control over the relationship.

2. Banks and program partners mutually decide whether to work together. Unit never determines whether a bank and program partner will work together. Unit facilitates a mutual due-diligence process that helps both parties learn about one another and get comfortable with a relationship.

3. Banks are deeply involved with their program partners. Banks meet with program partners regularly during onboarding and throughout the relationship. As a result, they often build deeper relationships (for example, lines of credit; corporate deposits) on top of the original program. 

4. Unit equips banks with powerful oversight tools. With Unit, banks have access to a suite of real-time oversight tools and a variety of types of information (for example, transactions, balances, disputes, and KYC information) without depending on the program partner to provide it.  

Ultimately, the appropriate relationship structure will depend on the characteristics of the bank's program with its program partner. 

As the digital financial services ecosystem continues to grow and evolve, we’re confident that there will be more clarity on how these relationships should be designed and implemented. In the meantime, banks and their program partners should consider the roles and responsibilities of the various participants and ensure that the relationship aligns with the principles of bank control and oversight.