Coastal Financial in Everett, Wash., has embraced the concept of banking as a service by issuing debit cards, providing deposit accounts and more for fintechs such as Aspiration, Ellevest and One Financial.
But the community bank had devoted several years to these efforts when executives realized they needed more help with back-end work, such as billing its fintech partners and ensuring the fintechs' customers have received the required disclosures.
“We did a complete market analysis,” said Eric Sprink, president and CEO of the $1.75 billion-asset Coastal. “We interviewed a lot of different firms and tech companies, and at the end of the day we didn’t meet a company that had the full range of services to meet a bank’s needs in banking fintechs.”
These challenges are shared by other community banks that sell their services to fintechs — or would like to — but may not have the resources or the technical expertise to nurture multiple partnerships. At the same time, fintechs may need help connecting with potential bank partners that can help them fill licensure and compliance gaps. The solution Coastal arrived at, a collaboration with a fintech that can handle all the compliance chores that go with banking-as-a-service offerings, could become an option for other community banks.
Coastal recruited Diagram, a Canadian firm that invests in companies in the financial and insurance sectors, to help build a product that would meet its needs. The fruit of that collaboration is Synctera, a platform that helps community banks ensure fintech partners are compliant with bank regulations and more. It launched on Dec. 8 and was developed over the course of 2020; Diagram was a key early investor and Coastal served as a founding investor and the first client.
Synctera hopes to take on more bank and fintech clients and eventually become a marketplace for companies seeking support for pre-existing relationships or, perhaps, a referral to a new relationship.
Such support is key because small and midsize banks “don’t have the resources and abilities to put their fingers into as many opportunities as large banks do,” said Ron Shevlin, director of research at Cornerstone Advisors, a consulting and research firm based in Scottsdale, Ariz.
In a December survey of senior executives from 235 midsize bank and credit unions, he found that 66% say fintech partnerships will be important in 2021. But 46% of these institutions only have one or two employees dedicated to this strategy full time.
There are several challenges facing banks that want to partner with fintechs, said Rolland Johannsen, senior consulting associate at Capital Performance Group in Washington. They must determine who owns the customer experience, how viable the product is, and what the risks are regarding liquidity, concentration, reputation and compliance. But community banks in particular may not have a lot of flexibility in their operating or technology systems.
Synctera tries to solve some of these problems for smaller institutions that find it daunting to manage fintech relationships but want to expand their market presence and boost deposits on their balance sheets.
For example, it ensures that fintechs are compliant with bank regulations, for instance by monitoring for money laundering and fraud. Synctera does this by centralizing data relating to customers, accounts and transactions and analyzing it for anomalies. Synctera reconciles transactions between the bank and fintech by comparing the balance in the bank’s one omnibus account that holds all of the fintech’s customer deposits with the sum of all individual balances from the fintech’s customers every day. It also tracks whether the fintech has given its customers the proper disclosures using data analytics.
If a fintech wants to increase the rate it pays on its deposit accounts and needs to get approval from its bank, Synctera will streamline communications between the two parties on its dashboard and verify interest calculations to make sure customers are being paid an accurate rate. It can also package the capabilities a bank can sell to fintechs, including know-your-customer checks, card processing and account management, so fintechs can sign one deal.
Sprink says billing is one prime challenge that Synctera will smooth over through automation. Typically, Coastal depends on accountants to manually prepare invoices for its fintech partners each month.
He chose One Financial as the first fintech that Coastal would onboard to the Synctera platform. One is a banking app that bundles spending, saving and borrowing functionality into a single account and debit card, created by Capital One alum
Synctera will help Coastal handle billing, reconcile account balances and ensure all proper disclosures have been sent to One customers. Coastal is also nurturing relationships with 10 fintechs that will go live by year-end, ranging from challenger banks to investment-focused firms to lenders. As the relationships mature, they will migrate to Synctera as well.
Shevlin notes there are other fintech-as-a-service providers, including Treasury Prime, Moov and Unit, that offer similar benefits so banks can widen their range of services. “They can take some of the load off financial institutions in terms of vetting, negotiating and even contracting,” he said. “But where they really come to the table is creating this integration layer that enables the bank to more rapidly partner with fintechs.”
The larger goal is for Synctera to become a two-way marketplace for fintechs and banks to join forces, said Peter Hazlehurst, CEO of Synctera and the former head of Uber Money.
“We want to bring a bunch more banks into the ecosystem that will have different risk tolerances,” he said. “Some don’t want to do crypto; some want to lend and don’t want deposits. Our job will be to effectively match-make between what the bank feels is the appropriate level of risk to take and what the fintech is prepared to pay.”
Sprink sees the service as particularly vital to community banks.
“Banking is under tremendous pressure with margins collapsing due to low long-term rates, and some communities are not growing as handsomely as the Seattle market,” said Sprink. “This is giving community banks an opportunity to diversify their earnings.”
