As fintechs chase OCC licenses, are sponsor banks at risk?

• Key insight: German fintech Pliant hired Coastal Financial to support Pliant's U.S. expansion. 
• What's at stake: Pliant believes the collaboration will ease compliance and technology deployment.
• Forward look: As more fintechs seek bank licenses, payment experts say there will be more competition for sponsor banks, but also new opportunities. 

The past few months have seen dozens of fintechs receive bank charters, a trend that impacts the market for the traditional banks that partner with non-banks to manage compliance, risk, onboarding and other tasks that may be difficult for fintechs to manage. 

Yet demand for sponsor banks is still high, according to Brian Hamilton, president at Coastal Financial Corporation. "A lot of these financial firms have difficulty reaching new customers due to tech challenges," Hamilton told American Banker. 

Coastal this week signed a deal with Berlin fintech Pliant to be the fintech's sponsor bank for its U.S. expansion, enabling Pliant to add payments and other financial services without having to obtain licenses and manage compliance. 

"This is an example of us partnering with a firm to reach other businesses they may have not been able to reach otherwise," Hamilton said. 

What Pliant wants

Pliant, which has a money transmitter license in the European Union, said using a sponsor bank in the U.S. improves speed to market.  

"Our first step in the U.S. is to issue cards, and you need a bank license," Pliant CEO Malte Rau told American Banker. "This gives us licenses for all 50 states." Pliant, which was founded in 2020, recently raised $40 million from Illuminate Financial, Speedinvest, PayPal and others, providing capital to fund a U.S. move. Pliant has more than 3,500 clients in Europe, and recently acquired Austrian insurtech hi.health to reach clients in healthcare. 

The Everett, Washington-based Coastal Financial Corporation offers financial services directly to customers, and also is a sponsor bank. In the fintech world, this includes selling banking-as-a-service to fintechs and consumer brands. In a separate business, Coastal Community Bank also manages 14 branches, mostly in the Seattle area. 

As a sponsor bank, Coastal keeps part of the interchange for the card transactions. Rau said it's worth it because it enables Pliant to issue cards quickly across the U.S., and eventually add other payment products such as digital transfers and ACH payments. 

Coastal's sponsor bank clients include fintechs such as Dave and Robinhood. It also partners with Walmart on the retail giant's OnePay card.   

"They run a lot of large programs," Rau said, adding Coastal also supplies bank identification numbers, which he says is another useful compliance function. 

The outlook for sponsor banks

As fintechs increasingly add OCC licenses to take advantage of a positive regulatory environment, payment experts say traditional banks will face a new challenge in selling services to fintechs.

"As more fintechs obtain banking licenses, traditional banks can expect increased competition, while sponsor banks may see both challenges and opportunities. Fintechs have already differentiated themselves by delivering highly tailored, frictionless customer experiences and innovating at a pace that many incumbent banks struggle to match," Danila Hawkins, partner and U.S. head of payments at Capco, told American Banker.

Operating under their own banking license reduces fintechs' reliance on sponsor banks, many of which continue to operate on legacy technology. Fintechs with their own charters have greater control over product development, compliance and speed to market, according to Hawkins. "For sponsor banks, this could mean losing some software support relationships as larger fintechs become self-sufficient," Hawkins said.  "At the same time, it may allow sponsor banks to refocus on earlier-stage fintechs and higher-value partnership models, creating opportunities to support the next generation of innovators."

But not every licensed fintech will necessarily move faster, Hawkins said. 

"While independence removes reliance on a sponsor bank, holding a banking license also brings regulatory oversight, capital requirements and compliance obligations that can slow innovation," Hawkins said. 

Fintech vendor charter growth is real, but it's concentrated mostly among crypto and digital asset companies pursuing national trust charters rather than the broader ecosystem, according to Benjamin Nestor, strategic advisor for commercial banking and payments at Datos Insights. 

"While there are certainly some larger fintechs helping lead the narrative around this, for most fintechs, a bank charter remains prohibitive, particularly for those still running at a loss," Datos' Nestor told American Banker. 

What has changed in the sponsor bank market is fintechs' expectations of their sponsor banks and the degree to which banks are willing to become sponsor banks, according to Nestor. "Fintechs that are responsible now arrive at sponsor bank relationships with different expectations when it comes to Bank Secrecy Act and anti-money laundering compliance," Nestor said. "However, even if rising expectations has introduced new challenges and makes sponsorships more onerous on both sides, it's still mostly viewed as an easier path relative to fintechs pursuing a charter."

There are potential unintended consequences in having a bank license and performing the functions of a regulated entity, according to Phil Philliou, payments industry consultant.

Philliou recalled a conference in which crypto and fintech execs shared their plans for bank licenses. "Most focused on the economic value created by being able to in-source certain banking functions and it really made me wonder if they fully appreciate what a sponsor bank does," Philliou told American Banker. "For example, I doubt that some fintechs will be able to replicate a bank's culture of prudence and conservatism that is required in fraud and risk management. Another unintended consequence will be that as the biggest, best fintech programs leave sponsor banks, the remaining banking-as-a-service pool of smaller and riskier clients will cause some sponsor banks to drop out, as their compliance costs will exceed revenue." 

It will also be an argument for consolidation among sponsor banks themselves, according to Philliou. 

"With consolidation, the remaining sponsor banks will become more efficient and technically advanced," Phillious said. "For example, strong sponsor banks will incorporate AI-driven transaction account reconciliation tools so that fintech partners and banks reconcile in real time and can generate reports for regulators on the spot."