The Banks Behind the Fintechs
These banks have a win-win relationship with your favorite fintech
Financial technology offerings, also known as "fintechs," are services that leverage technology to deliver financial services to businesses and consumers. These products tend to make the customer experience easy and inexpensive, and people can increasingly use mobile devices or computers to manage their finances. This convenience may come at a cost to consumer protections.
Examples of fintech providers include:
- Banking services that you can use entirely with your mobile device, and which tend to minimize fees
- Online lenders that provide near-instant quotes and approval decisions, streamlined applications, and competitive rates
- Payment tools that let you send money to friends and family instantly (without logging in to your bank account, writing a check, or getting cash)
Why Fintechs Need Traditional Banks
Fintech providers excel at making financial services easy for consumers. They develop intuitive apps, help consumers avoid fees, and sign up new customers quickly. But customer acquisition and beautiful apps aren’t enough—these companies benefit from working with banks.
- Access to funds: To fund loans, an online lender needs a source of money. Banks offer that source.
- Infrastructure: To transfer money to your bank account or process payments, fintechs can use the existing payment “rails” already in place. For example, a fintech can develop an app that includes a debit card from an established bank.
- Regulatory compliance: Fintechs need to follow regulations that protect customers. They certainly don’t benefit from negative publicity (after data breaches or abusive behaviors, for example). Plus, regulators will impose penalties or increasingly strict standards if fintechs harm consumers or enable criminal activity.
- Consumer confidence: Customers are more willing to try a new service if they know their money is safe. Fintech providers prominently explain that your funds are FDIC insured (when applicable) and include that information in FAQs.
Before using a fintech app, check to see if your money is safe. If there’s no FDIC insurance on your deposits, you could lose money if the company fails.
Fintechs could become banks, but doing so is expensive and distracts from the core business. For example, online lenders might need to register in multiple states and keep up with evolving regulations. The so-called "rent-a-charter" model allows fintechs to partner with banks and use their regulatory approvals behind the scenes.
Banks can also benefit from these relationships. Fintech companies seem to have a knack for going big: They excel at customer acquisition and user experience, and they may have access to venture capital funding to develop apps and innovative features. Instead of watching challenger banks eat their lunch, “standard” banks can partner with fintechs and get access to millions of consumers.
Potential Pitfalls for Consumers
While technology can make life easier for consumers, working with a fintech provider may have pitfalls. In this uncharted territory that relies on automation and big data, unintended consequences can result. Some consumers may even be treated unfairly—even when fintechs have no intention to discriminate.
As one example, lenders might use your social network to determine whether or not to approve your loan application. To do so, a lender could evaluate the credit scores of people in your network (your friends and neighbors, for example) under the assumption that your creditworthiness is similar. However, regulators have expressed concerns about this practice perpetuating structural inequalities related to race and national origin.
Fintech offerings can also be confusing for consumers, and fintechs themselves may fail to provide accurate information about consumer protection. For example, in 2018, Robinhood launched a bank-like product and claimed that the account offered SIPC insurance. However, that proved to be inaccurate at the time (Robinhood later added FDIC insurance on qualifying deposits), and consumers may have put their money at risk.
5 Banks Behind the Fintechs
Cross River Bank
Cross River Bank has relationships with several high-profile fintech offerings. The bank, founded in 2008 and headquartered in New Jersey, is partially funded with venture capital and private equity. In response to the COVID-19 crisis, Cross River Bank was one of the top 15 lenders in the Paycheck Protection Program (PPP). The bank partnered with front-end service providers like Gusto, Kabbage, Intuit, and others to distribute those loans.
In addition to business lending, Cross River Bank provides funds for online personal loans. If you borrow money from Upstart, Rocket Loans, or Upgrade, Cross River Bank is involved. Plus, when you shop online, you might see offers at checkout to finance your purchase instantly with Affirm. Those loans also come from Cross River Bank.
Banks are helping fintech services expand their reach and offer loans to a growing customer base. In 2012, only 9.8 million consumers had a personal loan, and 4% of those loans came from fintechs. By 2017, over 16 million people had personal loans, and 32% of loans came from fintech issuers.
Celtic Bank also partners with several big-name fintechs. Like Cross River Bank, Celtic Bank is one of Affirm’s funding partners. Additionally, the bank works with OnDeck to provide small business loans and lines of credit. And if you’ve ever paid a local business through a Square terminal, that business might have borrowed from Celtic Bank indirectly. Square Capital has funded over $7.7 billion of loans to over 420,000 businesses, and Celtic Bank issues those loans. The bank was formed in 2001 and has headquarters in Salt Lake City, Utah.
The Bancorp Bank
The Bancorp Bank enables fintech banking services to offer financial services and payment cards to customers. Founded 2001, this bank has headquarters in Wilmington, Delaware, and specializes in branchless banking.
Chime’s relationship with The Bancorp Bank is an example of a mobile-first banking service that relies on a fully-functioning bank. Chime has a sleek app and website, competitive pricing, and a strong customer acquisition strategy. The Bancorp Bank handles banking services, including FDIC insurance on deposits for Chime customers. Chime also partners with Stride Bank to offer a credit-building credit card to customers.
The Bancorp Bank partners with several other big-name fintechs. For example, Venmo’s Mastercard debit card comes from The Bancorp Bank. The bank also issues cards for SoFi’s Money account, a cash management account that advertises no fees and a high rate on your savings.
Green Dot Bank
Green Dot Bank provides banking services to some of the most well-known brands in the U.S. Although Walmart is not exactly a fintech, the superstore has a relationship with Green Dot Bank to offer payment cards to customers.
Green Dot has some impressive fintech names as customers. Apple Pay and Apple Cash both run on Green Dot’s banking platform, making it a default option for iPhone users. TurboTax also utilizes Green Dot Bank’s services to offer debit cards to customers. If you keep funds with TurboTax or send your tax refund to a debit card, it goes through Green Dot.
At least two money management services work with Green Dot Bank. When you open an Individual Cash Account with Wealthfront, Green Dot provides the bank routing and account numbers along with a debit card you can use for spending. The Stash app has similar banking services, including a debit card issued by Green Dot Bank and compatibility with mobile wallets.
Any investments you have with services like Wealthfront or Stash may be exposed to market risk, and you can lose money in those investments. The FDIC-insured portion of your account (if any) is a feature that’s separate from your investments.
WebBank works with some of the biggest online personal lenders, as well as other household names. The bank was established in 1997 and is located in Salt Lake City, Utah. WebBank issues all loans for two online lending powerhouses: Prosper and Lending Club. The bank also issues loans and credit cards for Avant, which offers personal loans to those with bad credit, and WebBank previously partnered with Upgrade.
To supplement the personal loan offering, WebBank lends money to businesses through PayPal Working Capital loans.
- Fintechs offer products and services that can make your life easy and save you money.
- Banks provide infrastructure and regulatory know-how to support fintechs.
- Fintechs have been known to use alternative data in questionable ways to evaluate your application, or fall down when it comes to consumer protections.