Payments strategic alliances - the why, how and what to look out for

Strategic partnerships or alliances are on the rise in the payments and fintech space and in recent weeks we have seen traditional banks team up with technology and fintech companies to bring Buy Now Pay Later (BNPL) offerings to the market. 

Partnerships themselves are not a new phenomenon in the payments sphere. For years banks providing merchant services have teamed up with acquirers to provide them with acquiring infrastructure. Acquirers have entered into partnerships with Independent Sales Organisations and Payment Facilitators to bring them greater merchants volumes. However, high profile, strategic partnerships with the intention of creating a new product, accessing different customer demographics or overhauling legacy systems seem to be the direction of travel. See below for a summary of what often drives these initiatives, examples of how they can be structured and regulatory considerations to have on the radar.

Drivers

Strategic partnerships can benefit banks, payment systems and fintechs by, for example:

• Increasing the demographic reach of a product where a partnership will unlock new customer segments.
• Enabling one or both parties to leverage the brand of the other. This is particularly useful for smaller fintechs who have a shorter track record.
• Leveraging the regulatory status and / or expertise of a party. Where parties involve consumer credit, insurance and / or payment services the likelihood is that at least one party will need to be regulated. The other party may need to team up with a partner that has the requisite regulatory licences to offer a product. 
• Increasing a bank’s or payment system’s product offering without the operational uplift of building a proprietary product.
• Improving existing core banking systems through the use of a fintech software solution.
• Providing access to capital when venture capital is less freely available.

Structures

There is no one way to structure a partnership. However, the models below are ones that we frequently see being used:

• A formalised referral structure where typically banks or payment systems refer customers to their fintech partners. This enables banks / payment systems to maintain a competitive offering with value add services without building additional products or infrastructure themselves.
• A “joint offering” model whereby products from different service providers are offered through one application to enhance the customer experience and to boost cross-selling. 
• A white-labelling structure. For example, banks may purchase fintech products and offer them under their own brand. This reduces the potential friction introduced into the customer experience through the referral model. Alternatively fintechs might partner with other fintechs (such as e-money issuers and licenced consumer credit firms) to help them provide a payment services and credit offering.
• An integration structure. For example, banks may purchase credit assessment tools provided by fintechs and use them as part of credit assessments. Banks may also use fintech vendors to undertake functions ordinarily performed by a bank. Core banking services are on the rise whereby fintechs provide software solutions that manage operations including account ledgering, transaction processing and loan management. 
• Acquisition and integration. Acquisition is a common route particularly where there is a concern that a competitor might acquire a new fintech solution and speed to market become a priority.

Regulatory considerations

Regulatory considerations and alignment can be an important hurdle at the start of a partnership. In addition to due diligencing a partner’s compliance record, the following questions are worth keeping in mind:

• Who in the partnership is providing the regulated services and do they have the right licences/authorisations to do so?
• If consumers are involved, how will the UK FCA Consumer Duty apply to each party and is the product offering compliant with consumer legislation in general (e.g. unfair commercial practices)? For example, are the parties co-manufacturers or is the relationship one of a manufacturer and distributor?
• Will the partnership involve a party making financial promotions? If so, are they an authorised firm, can the promotions be approved or is an exemption available?
• Will one of the parties be deemed to act as an intermediary or agent that could trigger an (additional) authorisation requirement?
• Does the partnership involve an outsourcing and is there an outsourcing agreement in place which complies with the applicable rules (e.g. EBA outsourcing requirements in Europe or the FCA/PRA rules in the UK)?
• Is the partnership adequately mapped into regulated parties’ operational resilience programmes (e.g. in view of the EU DORA regime)? 
• Do customer terms and conditions need to be updated so they are tripartite?
• Who is responsible for KYC? Will KYC be outsourced or relied upon in a manner that is compliant with the applicable money laundering regulations (e.g. AMLD or the UK Money Laundering Regulations)?
• If a fintech provides material services to a number of banks is it likely to be designated as a Critical Third Party under the EU DORA regime or the UK regulators’ new regime?

Regulatory considerations are just one piece of a huge project that also involves data, employment, corporate, competition and contractual considerations but they are important to keep in mind.