Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
No banking charter? No problem. Fintech companies team up with small-town banks
Los Angeles Times | Julie Verhage | Sep 27, 2019
Customers of Square Inc., the Silicon Valley payments behemoth, might assume that the cash they send to friends on the platform is housed in a glassy building in Silicon Valley, tended to by hoodie-clad tech workers. Actually, that money is more likely to be sitting in a 117-year-old community bank in Iowa.
Partnerships between high-flying tech companies and traditional banks, many of them tiny by comparison, are a key force behind the financial technology boom. Because virtually no tech companies have the license required to perform banking services, many of them partner with existing banks to offer a suite of services including checking accounts, credit cards and the back-end and regulatory work the tech companies aren’t equipped—or allowed—to handle.
Now, driven by the tech industry’s thirst to jump into finance, a new crop of businesses are looking to broker the connections between tech and banks. One such business is Cambr, a little-known division of an investment company called StoneCastle, which counts Square and other fintechs as customers. StoneCastle works with more than 800 small banks, spread across the country, ready to take and hold deposits from Silicon Valley start-ups such as Square.
See: What does the future of banking look like, according to the experts?
“Airbnb, one would argue they are one of the largest hotel chains that doesn’t own a room,” said Josh Siegel, chief executive of StoneCastle Partners LLC. “Our network works in a similar way. We have an account at the bank, it’s the room we rent, and we can rent it out to whoever we want.”
Cambr’s service launched last year as a partnership between StoneCastle, which provides the bank connections, and digital banking platform Q2 Holdings Inc., which works on the software and programming. Square’s Cash App was one of Cambr’s first customers, Siegel said, and it has since added start-ups such as Acorns Grow Inc., MoneyLion Inc., Qapital Inc. and robo-advisor Betterment LLC, in a recently announced deal.
What Cambr aims to offer tech companies is a ready-made strategy to accept deposits that they wouldn’t otherwise have the license to handle.
Here’s how it works: A tech company or start-up might give Cambr as much as $100 billion of customers’ cash, and could then ask the service to spread the money around to potentially hundreds of different financial institutions. A result of spreading out the deposits is that more of the fintech’s cash is insured under the Federal Deposit Insurance Corp.’s $250,000-per-account guarantee, offering more coverage than if the money were deposited at a single institution.
The partnership model, which has rapidly become the go-to for financial technology companies, does pose some risks for banks, particularly if fast-moving start-ups draw the ire of regulators, as has happened before.
“The banks are the supervised entities so the buck stops with them,” said Brian Korn, partner and head of fintech practice at Manatt, Phelps & Phillips. “The regulators are waiting for situations where there’s a breakdown.”
But many community banks have embraced such partnerships, seeing them as a salve in times of digital disruption. More deposits can allow small banks to grow and make more local loans. In Cedar Falls, Iowa, the 117-year-old Lincoln Savings Bank, which works with Cambr, has boosted its revenue by partnering with fintechs, said Mike McCrary, who runs e-commerce and emerging technology for the bank. McCrary said that when Lincoln Savings Bank considered how it could best position itself for the next 10 years, fintech partnerships were an obvious answer.
See: One size doesn’t fit all: Strict regulations meant for big banks holding back fintech in Canada
“In order for us to be relevant years from now, there had to be something digital,” he said. “Now we’re putting a lot of resources into this area of our business,” including, he said, building out a new team dedicated to working with tech companies.
One option for tech companies has been to apply for an Industrial Loan Charter, which would effectively grant them license to provide financial services. Square first applied for the charter in the fall of 2017, but its request shows no signs of being approved. Social Finance Inc. also applied for an ILC, but withdrew its application altogether.
“It’s not easy to become a bank here, and we haven’t seen much traction in general with the ILC,” Matt Burton, partner at venture capital firm QED Investors, said. “What we have seen is continued demand for non-banks to offer banking solutions.”
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