The Future of Bank–Fintech Collaboration

With BaaS under regulatory scrutiny, what's next for bank–fintech partnerships? Ingo Payments CEO Drew Edwards moderates a candid conversation with leaders from KeyBank and Pathward to explore why banks still need fintechs, how to manage risk, and what successful collaboration looks like in today's evolving service economy.


Transcription:

Drew Edwards (00:10):

Hello. Good morning everybody. Can everybody hear me okay? That's good. I can't hear anything but what's going on the other side of this wall right now? So it's pretty loud in here. Look, I'm Drew Edwards, the CEO of Ingo Payments. I'm honored to be sitting here with executives from KeyBank and Pathward. We're going to let each person introduce themselves, but lemme try and set this up. Ingo's a company that's been partnering with banks for going on 25 years now. If you go all the way back, we actually ran 12 bank branches in Atlanta that we did not have a bank charter for. So we built the branches, service, the customers operated the branches. That's the old school version of a bank FinTech partnership, not what we do today. Today, the subject matter is all around bank FinTech partnerships, sort of the why and is it going to continue and the how and what about the regulatory environment we're in, et cetera. So I'm going to turn to my right and ask my guests to introduce themselves. We'll go this way, starting with you Bennie. Thank you.

Bennie Pennington (01:22):

Sure, thanks Drew. So Bennie Pennington, I'm a Senior Vice President of Embedded Banking products at KeyBank. That's my team. We lead all the development and commercialization of new software led commercial payments products for all of our clients. I've spent about 18 years in digital payments. First 14 years of my career working at a lot of large and small fintechs and then the last four years working for KeyBank and definitely excited to talk about the differences between banks and fintechs and why they should partner. Thank you Will.

Will Sowell (01:56):

Hey folks, my name's Will Sowell. I'm Divisional President of Partner Solutions at Pathward. Pathward is a 21-year-old bank that provides sponsorship solutions to fintechs and brands in the marketplace, whether that be for deposit accounts, money movement, acquiring capabilities. The president of the bank is Anthony Shire. He happens to be in the audience at the back table back there. Hello Anthony. Looking forward to this discussion today. There's a lot going on in this space. I've been in this space for 20 years, including time with GE money now, synchrony Green Dot when they were up upcoming FinTech as well and also spent some time working for Drew at Ingo Payments. Looking forward to the discussion, Drew.

Drew Edwards (02:42):

Will's a bit of a unicorn in this conversation because he's the only guy I know that was the chief operating officer for what was one of the hottest FinTech bank sponsorships in the market when Green Dot was growing and buying a bank charter and going public. So he's got the operator side of things. We'll get to that in a little bit in a point of view, and today running on the other side of the house for password, those very kinds of relationships and password is one of the oldest and largest and most innovative of those banks in that space. And so let's start Will with Bank FinTech partnership, sort of the why and even your opinion on are we seeing the end or is this just the beginning of where we're headed with this?

Will Sowell (03:37):

Well, at Pathward, our mission is to provide financial inclusion for all and whether that is a consumer looking for an alternative banking product or a small business that's looking for merchant acquiring or even lending from our lending side of the house, we go to market through fintechs. So for us, we believe it's a continuum. This isn't to us the beginning or the end. Fintechs are going to continue to exist over time. If you go back 20 plus years, there was a different flavor of the FinTech bank relationships and maybe it was just gift card or reloadable cards sponsorship that was happening then. Now it's much more around money movement and embedded finance capabilities. So I think banks need fintechs to drive innovation. Fintechs move quicker than traditional banks do. They push us to innovate. That innovation then provides utility to consumers. Where would we be without say a PayPal or Venmo for example, or where would we be without the disbursement capabilities that exist today? Those are really driven by fintechs and then the banks typically participate from a sponsorship perspective or develop their own capabilities over time. So Drew, I don't think we're at the end for sure. I think we're kind of almost at a renaissance over the past couple of years as these partnerships continue to grow.

Drew Edwards (05:07):

So after we hear from Bennie, we may come back and talk about the current regulatory environment as it relates to that. But Bennie, you're not the typical FinTech kind of bank, right? I mean, you're one of the top 15 banks in the nation, so I'm interested to hear your perspective on the very nature of fintechs and what's KeyBank doing with them and why.

Bennie Pennington (05:29):

Sure. I'll speak about key Bank's perspective on it and in my view on the ecosystem as a whole. So at KeyBank we absolutely lean into the need for fintechs and FinTech partnerships. We've been in the business of partnering with fintechs for at least a decade. We actually lean into the fact that there is going to be technological disintermediation when it comes to what our clients are looking for and the emerging types of digital payments that they're looking for, the emerging types of ledgering solutions and a variety of other solutions that we're not always going to be able to build in-house. Or if we can by the time we build it, our client would've already solved it with a FinTech. And so we are definitely in the business of partnering with companies like Ingo and a variety of others to help solve our client's needs that we can't do on our own.

(06:17):

So when a client comes to us with a particular challenge that has been a longstanding client of us on the lending side or on the payment side and they say, Hey, I've got this challenge, we absolutely want to find a right partner if we don't have them already that can help them make that payment or get that reconciliation or be able to create that new channel for them while still doing it within the DDA that they have here at KeyBank. So we're excited about our partnership with Ingo that we've had for a long time and we see that continuing with a lot of other fintechs as well. When I look at the broader ecosystem as a whole, fintechs out there will always need banks because at the end of the day for any transaction, there is a bank that has to settle that payment at the end of the day, and our perspective at KeyBank is we want to be the bank that fintechs come to settle those payments.

(07:07):

We want to make it attractive for fintechs to want to work with us and we want to make an ecosystem available for those fintechs to be able to get larger distribution that they need. And so I see fintechs and bank partnerships continuing to thrive, continuing to grow, and as digital payments continue to evolve at faster and faster paces, we as a bank on our own will never be able to keep up with the pace of innovation. So we'll always be looking for that right partner that can deliver the right need to the client in time.

Drew Edwards (07:36):

Can I get a quick show of hands? I mean, if you're a bank or work in a bank or a banker, could you raise your hand so I can understand who's in the audience? Perfect. So if you've been around as long as some of us have in the space, you remember Operation choke point, there was a point in our career where everybody believed the regulators had it in for MSBs, had it in for money services business, wanted banks to stop banking these businesses, and a decision had to be made. And so the most, and today by the way, MSBs are thriving and banks that have embraced partnerships with MSBs are thriving and all of that is in our rear view mirror. And now in the wake of synapse and other sort of disasters in the market that keeps coming up in conversations with us, is this another operation choke point or are we in environment where the regulators are anti FinTech bank partnerships? Is this one of those Renaissances as Will's talking about that right? What I'd like to do is dip into that a little bit. We'll start with Will again and come back this way, but is this operation choke point? Is that what's happening in the regulatory environment? Do the regulators have their mind made up that this is all bad if it's bank FinTech, it needs to end or where do we go from here?

Will Sowell (09:07):

Sure. I think it's a fascinating and contemporary question with all that's going on in the marketplace today of how do the regulators view bank FinTech relationships? I think our perspective is we welcome the regulatory scrutiny. We welcome a level playing field between banks and how they compete with their FinTech relationships. Certainly we have an obligation as a bank to ensure that we're regulatory compliant and we actually sell on that. So part of our value proposition when we go to the market is we talk about regulatory scalability and oftentimes when people hear the term scalability, it's generally associated with technology. Well, we're a sponsor bank, so unlike KeyBank, which is a retail bank as well, our sole purpose is on the payment side is to go to market as a sponsoring entity. So as such, we have to know our fintechs really well and we have to know what the regulatory expectations are with our interactions with them.

(10:14):

So as Drew would likely attest in his interactions with Path Word, maybe we're a little bit slower to get you to market if you're a FinTech, because our goal isn't necessarily speed to market. It's making sure that we well understand your payment product, your use case, your customer, so that you can, as you grow and scale that program over time, we provide you some comfort from a regulatory perspective because the last thing you want as a FinTech is to put all your time and effort into growing and scaling a program that really leads to the success of your business only to have a regulatory issue with your bank that then stalls the growth that you have with your business. So we don't believe that the regulatory environment prohibits banking, FinTech relationships in any way. We do think the regulators are holding banks accountable for playing their role in that ecosystem, and that's what the fintechs have to understand as well is that we certainly have a role to play. Fintechs don't always like that, but it's incumbent upon the bank in those discussions and in those partnerships with the fintechs to make sure it's clear the roles and responsibilities of the organization.

Bennie Pennington (11:30):

Yeah, I'll touch on that word you said at the end responsibilities, and I think there is a role for responsibilities on both sides when it comes to the partnerships that allows for things to continue to progress in a compliant manner. And so I think the bank has to make sure a, that we're picking the right partner. Not every FinTech is a partner of KeyBank, and so there is due diligence we have to do on that FinTech, their operations, their leaders and all that to make sure that we know who they are, what their policies are, how do they vet their clients, what is their disaster recovery policy, how do we test that, how do we stress test it? And when it passes all our marks, then we can talk about a partnership, but the bank also has to have responsibility to not fully give over all the responsibilities on KYC in compliance. Yes, we want the FinTech to do that, but we as a bank also have to do our responsibilities in that and making sure we know who that end customer is or that end client who is ultimately receiving that payment or initiating that payment. How do we validate that? How do we make sure we've got an auditable records of that? And as long as you've done that due diligence and you've tested that and you do ongoing compliance of that FinTech, the regulation should be readable in most of the instances.

Drew Edwards (12:47):

I probably should have set this up before I ask that question, but let me try and delineate a couple of things for everybody. Fintech's a broad word, right? Financial technology, I guess FIS is a FinTech and Fiserv is a FinTech and Chime is a FinTech and these are two very different things and how you approach it, I guess is two very different things. So what I would challenge everybody on is sometimes a bank is just partnering with a FinTech for their technology. Like what we do with Qbank today is not a sponsorship centric kind of role. They leverage our technology to improve customer experiences in the key bank business banking, treasury banking side of things. So never in that kind of environment are we even touching their customer, their underwriting, their BSL, their AML, et cetera. They're using technology provided by FinTech to make all of that work in a way that is better than, and at least our opinion, their existing core banking systems might be.

(14:02):

At the same time. On the sponsorship side, the world's evolving a lot here where you can acquire technology from somebody like us or others and build a new business model where the bank is your background, the bank is your underlying sponsor, and in that scenario, it's more of what Will's talking about because you're actually partnering with a FinTech to create new customer relationships for the bank to bring new deposits to the bank, and that puts you square in the middle of a different set of risk and regulations. Both of those are okay, both of those are happening successfully in the market. That sort of leads us to my next question, which is should fintechs have their own bank charter? I was going to do this at the end will, but I flipped it around and if so, why? And if not, why not? Right? And sort of where do we think this is headed? I think there are some examples out there where there are some special purpose charters that have been issued. There are examples where fintechs have gotten bank charters and sometimes that worked out and sometimes it didn't, right? So let's go back to the other side will and start with you. I mean, should fintechs be a bank?

Will Sowell (15:25):

Well, I think that's a really very interesting question that's highly complex and nuanced, and not surprisingly, I have a bit of a bias there given that we are a bank that sponsors fintechs. So if a FinTech wants to be a bank, there are certainly some things they need to consider. There's an argument to be made that you do vertical integration, therefore margins are going to improve. That kind of ignores the scale play that a large sponsorship bank can bring you. So if you're a series a, series B startup pursuing a bank charter, is that going to make sense for you? That's for to decide, but I think that's really difficult. If you're going to be a larger FinTech, then maybe you have the sophistication to seek your own bank charter, but then you have to ask yourself, is the risk worth the reward there? So if you were a bank, if you were a FinTech and you acquired a charter and all your business ran through that bank charter, what happens then if you have a regulatory issue with your bank?

(16:33):

So then the contagion from your bank now is going to affect the growth of your overall product as a FinTech. So that that's the challenge you have to mitigate against a better approach on. What we see more in the marketplace today is a FinTech that will diversify their banking relationships. So they have multiple sponsor banks, they may have key bank for one set of products, they may have password for others or they may have us both sharing the same type of product. That way if we have a regulatory issue, then key bank's able to stand in or vice versa. That seems to be a bit of a moderated approach there to how fintechs look at bringing on their bank charters. The ones that we do, we do what business with a number of fintechs today that do have special purpose charters, but they tend to look at those special purpose charters more as a BCP scenario as opposed to that's how they want to run their day-to-day business.

Bennie Pennington (17:33):

Yeah, I think a lot of what you were getting at is diversification of risk, and I think that's important when it comes certainly at a bank and I believe with fintechs as well. And so if you ask me should a FinTech get a bank charter, there's probably 1% of fintechs that are ready for that challenge. A very small percentage, some of them it may work for, but for the vast majority, they're going to have easier overhead, faster time to market and smoother regulatory hurdles if they partner instead of trying to stand all that up on their own to avoid the concentration risks that he was talking about as well as some of the expertise that's needed to be able to manage those programs and manage all those operations effectively.

Drew Edwards (18:19):

Does anybody know what time we're supposed to finish? So I don't go, is it five minutes after or

(18:26):

I think we got, ten five minutes in. Five minutes. Okay. I think I'm going to just stop here for a second and see if there's any questions from the audience that you guys would like us to answer or for anybody up here. And if not, I can ask a different question if you've got any kind of question or something that we're not covering. If you want to raise your hand. Yes ma'am. Right up here, sir.

Audience Member 1 (18:53):

Thank you. I just wonder what all you guys think about the reconciliation rule that the FDIC proposed where if there's a bank FinTech relationship where they're end customers that the FinTech and the bank have to agree on what the account balances are at the end of every day. Do you guys think that makes sense or is it something like that needed?

Drew Edwards (19:20):

Go ahead. Could you repeat the question for?

Bennie Pennington (19:22):

Sure. I think the theme of the question was around new regulation around requiring in the instance of a bank FinTech partnership where there are accounts involved that the bank and FinTech agree on what the account balance is. Is that the question?

Audience Member 1 (19:35):

At the end of every day like a daily reconciliation?

Bennie Pennington (19:39):

Sure. So I'll speak about what key bank's best practices are in situations like that is we absolutely want a record at all times on what those balances are. If our client has distributed accounts through a FinTech or that are hosted or branded by that FinTech, we absolutely need at minimum daily reconciliation files where we agree with the FinTech on what those appropriate balances are that protects us. It protects the FinTech and it protects the client and ultimately it gives us better data, it gives us better insights. And so that's our best practice is that we definitely do at minimum daily reconciliation in scenarios like that.

Will Sowell (20:17):

I very much agree with what Bennie said. So just an add on. I do think that it's the bank's responsibility to, at the end of the day, it is the bank's customer. So to that end, I think it is the bank's responsibility to ensure they have line of sight into the balances on customer's accounts at the end of each day. So for us, we do require whatever the system of record is typically a processor to provide us daily what the balance is on those accounts, and we need to ensure that we can reconcile to those accounts.

Drew Edwards (20:49):

The beauty of all that you guys is that technology makes this work. So the notion that you're not reconciled in real time, that you're not reconciled, not just every day, but all the time that the bank doesn't have complete control over what money's flow and what money's not, the ability to shut it down, the ability to see it, the ability to monitor it and it be integrated with their core B-S-A-M-L and risk management systems. It should have always been that way. I can assure you that we've been doing this for a long time and it can be done right, but I can't tell you how many times we have three full-time lawyers out of 250 employees and people go, that's just insane. I said, you should see our outside legal bills because you can't play with banks, you can't open accounts, you can't do this kind of business and not keep track of the money and not be able to answer to the regulators. So I would encourage everybody to just choose your partners wisely and set that notion aside the days of, well, I can't tell you how many times I've heard of FinTech entrepreneurs say, yeah, no, we just got an FBO account at the bank. We don't need money transmission. We put everything in that FBO account. And that to me is a thing of the past. Any other questions?

Audience Member 2 (22:30):

Hi, thank you. So obviously you work with banks that are both young and old and all different sizes. How does a bank get started matching with a platform and fintechs like Ingo?

Drew Edwards (22:42):

How does a bank get started,

Audience Member 2 (22:44):

To match with you basically to scope and scale a relationship in a partnership with Ingo?

Drew Edwards (22:51):

Oh, with Ingo, well thank you. Long and slow, right? I mean, we've been around 24 years and it depends on what you're trying to do. So in the case of KeyBank, this relationship has literally taken five years to get to the place where we're all beginning to feel like we're going to have an impact here. And so this is not divulge any secret sauce there, but KeyBank is one of the smart banks that's using technology, some of which we provide to modernize customer experiences, treasury experiences, payout experiences to bring to market choice and better choices and things in market. So if you're a big bank like that, trying to do something, ask around, I guess those are really slow processes. We don't generally just go stand up neobanks or do things like that. We're very selective in our bank processes in both directions. I would encourage you, there are a lot of really good FinTech and financial partners out there in the market.

(24:01):

I guess the message I want to make sure we end with is I don't believe, I used to be a regulator at the Federal Reserve a hundred years ago. I used to be a correspondent banker, which is not a real banker. I've never gotten a bank in trouble. We actually started as a Hispanic bank, and I don't speak Spanish. I guess I would say banking without fintechs is not a path to innovation, no offense to any bank in the market, but it kind of takes the entrepreneurial capital and the entrepreneur's willingness to fail small and to fail outside the bank to create innovation. And then the banks get to stand on the sidelines and go, okay, let's tiptoe into that. Let's pick the right partner and let's get into this. And this drives innovation in banking, right? So I think we're out of time, but any other questions? One more, sir.

Audience Member 3 (25:00):

Hi. Have you seen any demand on stable coins yet within your banks or the embedded finance solutions?

Will Sowell (25:15):

Yeah, we've seen a lot of demand for stablecoin, especially as it relates to, I would say business to business or business to consumer payments, especially in cross-border use cases as well. So our approach to date really has been to build on-ramps and off-ramps for that. As a sponsor bank, there's a large opportunity to participate. There's going to be an exchange, stablecoin has to hold a one-to-one reserve and fiat. So there are lots of opportunities I think for banks to play. I think the regulatory marketplace is a bit unsettled yet as it relates to stablecoin. But for a sponsor bank and certainly for fintechs, there's a long runway of growth as it relates to stablecoin, which brings, as we all know, the benefits of crypto, but stabilizes the currency risks that's associated with most crypto payments.

Drew Edwards (26:07):

Anything on that?

Bennie Pennington (26:11):

I'll say a key bank. We have had interest from clients, wealth clients, commercial clients for a variety of digital currencies primarily so far around us holding those assets for them. And we are exploring what we can do there, but there is some demand and I think there will be some things come.

Drew Edwards (26:32):

Thank you everybody. I promise to stay on time, so I appreciate everybody coming and enjoy your conference.

Will Sowell (26:38):

Thank you.