How control and innovation can coexist in bank fintech partnerships

As banks increasingly partner with fintech companies to expand their customer bases and sources of revenue, regulatory scrutiny has grown, challenging banks to balance the need for innovation with stringent regulatory requirements.


As banks have increasingly partnered with fintechs to expand their customer bases and sources of revenue, they’ve come under closer scrutiny from regulators. In 2022, the OCC ordered Blue Ridge Bank to improve its oversight over third-party fintech partners, and the bank must now obtain a non-objection from the OCC for any new partners or products it adds.

More recently, Cross River Bank entered a consent order with the FDIC over fair lending compliance that required the bank to strengthen lending and third-party compliance controls and prepare assessments on fair lending compliance.

While banks are heavily monitored and regulated, their fintech partners don’t receive the same level of oversight. Despite this, the bank is still responsible for ensuring that any interaction it facilitates through a partner meets compliance requirements. 

So how did we get here? And how can banks balance the need to meet stringent regulatory requirements while continuing to innovate?

What is Banking as a Service (BaaS)? Why does it concern regulators? 

In the last 10 years, and particularly over the last five years, fintech growth has rapidly accelerated. At least 30% of the banking industry’s revenues from products such as payments, personal loans, and credit cards are sourced through third parties, making up $2.6 trillion of total U.S. financial transactions in 2021. By 2026, that number is projected to reach $7 trillion.

While many of these providers are seen as competitive to traditional banking, most actually continue to rely on financial institutions to facilitate some portion of their activities. In fact, studies have found that regardless of age, customers are 2.5 times more likely to purchase embedded banking products if the product is managed by a bank partner. 

Lending is a common example. In this scenario, the bank sets the parameters for their loan products and the fintech partner uses those parameters to lend money from the bank’s balance sheet. 

In some respects the model might seem harmless—if the bank sets the loan parameters and the fintech executes them correctly, then there’s no harm. However, this model erodes a fundamental principle of banking, which is that the bank (or credit union) is ultimately responsible for assessing borrower risk and making a decision.  

Amidst the proliferation of the BaaS model and growing concerns amongst regulators, a group of U.S. government regulators recently released interagency guidance relating to relationships with any third-party partner, including fintechs.  

“Whether activities are performed internally or via a third party, banking organizations are required to operate in a safe and sound manner and in compliance with applicable laws and regulations. A banking organization’s use of third parties does not diminish its responsibility to meet these requirements to the same extent as if its activities were performed by the banking organization in-house.”

The regulators have continued to maintain a position that any type of third-party relationship, including fintechs, is effectively an extension of the bank itself. In the case of the aforementioned regulatory fines, the fintechs (and therefore, the banks by extension) were not adhering to applicable regulations, therefore requiring the regulators to fine the banks and not necessarily the fintechs.  

How can banks expand distribution and drive efficiency while maintaining control? 

Despite the regulatory pressures and risks, fintech partnerships do serve an important role in the market, from advancing digital experiences to automating risk analysis. The good news is, advancements in technology coupled with business model evolution are enabling these benefits to co-exist with regulatory frameworks.  

Imagine a world in which a lender can fully utilize fintech innovation, while still being able to review each loan individually without sacrificing timeliness or thoroughness.  

Consider Lendio’s Embedded Lending Marketplace, which allows partners with large networks of potential borrowers to embed a lending marketplace within their own branded platforms and ecosystems. The model works like this:

  1. Using data sourced through the partner, Lendio is able to pre-populate a significant amount of the data required for a loan application.  
  2. That data is then supplemented with additional data supplied by the borrower and/or sourced from third parties such as credit bureaus, KYB vendors, and bank data aggregators.  
  3. This application data is then shared with prospective lenders through an API to an existing LOS or Lendio’s Intelligent Lending platform
  4. Those lenders then return instant offers (under 15 minutes) within the embedded experience on the partners’ platform. The borrower can then select the offer that best matches their needs before meeting final stipulations and proceeding to funding.  
  5. Final loan documents are customized to the lender, but are presented and signed within the embedded ecosystem.  

While this approach may sound remarkably similar to the aforementioned BaaS models, the key differentiator is that the lender maintains full control over loan decisioning and documentation ensuring that all loans issued follow its risk policy and other compliance regulations.

How these models are equally relevant to traditional channels

Many of today’s banks who are participating in fintech partnerships and BaaS models are doing so as a largely independent strategy from their traditional community or regional banking relationships. Some have even gone as far as to create a separate division, implement a new core, or create legal separations in the business. While those steps may be useful to drive focus on BaaS, they do little to help the bank’s existing business.  

Lendio’s digital borrower experience and automated underwriting technology described above can be used both in embedded finance and to lend to the bank’s own customers. The challenges here are arguably more acute, where most lenders rely on paper-based processes to originate and decision loans. Fintech partnerships (but not of the BaaS variety) can help drive digital adoption, heighten the use of analytics, and improve underwriting efficiency.

Lendio’s unique capabilities

Some of the unique features Lendio offers traditional channels include:

Distribution: Access to embedded finance, Lendio marketplace, pre-qualification of the bank’s depositors, or new loan applicants 

Branding: Ability to build new borrower relationships by using the bank’s branding on all documentation, regardless of which channel first brought the borrower in

Borrower analytics: Insights into the borrower through self-reported data, credit bureau pulls, KYB data, and bank transaction data 

Smart decisioning: Use the lender’s credit policy to evaluate applicants across a wide range of attributes gleaned from borrower analytics through a machine-assisted or fully automated system 

Competitive intelligence: Insights into comparable institutions and their SMB loan programs with real-time analytics, benchmarking, and proposed policy adjustments 

Servicing: The lender closes and funds the loan and is responsible for servicing and collections

Solutions for risk management

As discussed in the updated guidelines, risk management of third-party vendors is an ongoing process from planning and onboarding to ongoing monitoring and the eventual termination of the partnership requiring compliance, technology, and legal resources. Luckily, technology can help ease some of the risk management burden as well, from automated underwriting and compliance checks to better fraud detection. Banks that are quick to adopt technology that eases their regulatory burden will be able to move faster in taking advantage of third-party partnerships.

Discover how Lendio Intelligent Lending can increase your lending staff capacity.

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