Bank and fintech partnerships

At first glance, Goldman Sachs’ purchase of GreenSky, announced in 2021, might have appeared to be the exit many fintech firms dream of. 

Goldman, one of the world’s largest investment banks, bought the installment-lending fintech in a $2.24 billion all-stock deal, completed last year, in an effort to combine the firm’s products with Goldman’s consumer-banking platform, Marcus. 

The purchase came at a crucial time for GreenSky. Navigating an increase in loan defaults both before and during the COVID-19 pandemic, the Atlanta-based fintech’s stock was down 70% from its peak at the time Goldman announced the takeover, The Wall Street Journal reported. 

Two months prior to the Goldman announcement, GreenSky agreed to refund or cancel up to $9 million in loans and pay a $2.5 million civil penalty to the Consumer Financial Protection Bureau to resolve allegations of “careless business and customer service practices” that allowed merchants and contractors to take out loans without consumers’ consent. 

But Goldman saw potential in GreenSky, and counted on the fintech to help it hit ambitious targets for Marcus, the retail platform it launched in 2016.

“We have been clear in our aspiration for Marcus to become the consumer banking platform of the future, and the acquisition of GreenSky advances this goal,” Goldman CEO David Solomon said in a press release in September 2021.

But just two years later, Goldman is looking to offload GreenSky, a move that comes as the investment bank scales back its ambitions for Marcus amid mounting losses and growing skepticism over the performance of the consumer-focused platform.

The pivot means GreenSky faces an uncertain future as it awaits a buyer, said Jennifer Fuller, U.S. financial services lead at PA Consulting.

A bidder could acquire the company as whole, or the firm’s platform and loans portfolio could be acquired separately, she added. 

“One thing is clear is that the sale will be at a significant loss to the price bought by Goldman Sachs just two years ago,” she said. 

Bids for GreenSky have come in lower than Goldman Sachs was hoping, according to a June report, spurring the prospect that the bank may have to take a write-down on the sale.

“Everybody’s been coming in low, and the Goldman team keeps pushing back, pounding the table about the value of it,” one of the bidders told CNBC.

While Solomon has positioned the sale as the investment bank’s effort to find a better long-term holder for GreenSky, the significant drop in price indicates a lower market value of the fintech since its acquisition, Fuller said.

“This will likely reflect the need to navigate the fallout from this high-profile endeavor including the reputational damage from the CFPB fines, poor consumer practices and oversight which failed to protect vulnerable customers,” she said.

Apollo Global Management, Pagaya Technologies and Sixth Street have submitted bids for the fintech, according to Bloomberg. 

Goldman has asked bidders to submit a third round of offers by early this month, sources told the wire service. 

A warning to others

Goldman’s retreat from the retail market means the firm no longer has a place for GreenSky, Solomon told analysts in April.

“We may not be the best long-term holder of this business,” he said.

Goldman’s acquisition and subsequent sale of GreenSky should serve as a reminder to other banks and fintechs to ensure a clear focus on how a potential deal aligns to the existing value proposition, brand and strategy of the firm, Fuller said. 

Firms eyeing similar transactions need to assess the cultural alignment of the organizations to ensure value isn’t lost through the deal, she said. Firms also need to align risk appetites and ensure there is an agreed on long-term strategy.

Fintechs shouldn’t count on the perceived security of selling to a financial services giant like Goldman Sachs as a means to navigate tough times, she said.

“Despite being bought by a large, established player with deep pockets, the poor performance of GreenSky, compounded by poor consumer practices and regulatory fines, has quickly changed the fortunes of the company,” Fuller said.

Goldman’s refocus on ultra-high-net-worth individuals shows that in a time of market and financial stress, firms will return to their core competencies and “down-the-fairway opportunities,” said Greg Cohen, CEO at Fortis, a payment and commerce technology firm.

“For Goldman, this is a natural exit of a segment they ran into during the free money rush and decided to exit as the world pivoted,” he said.

More broadly, Goldman’s shift in strategy is a prime example of the risk fintechs face when selling to large banks, said Solomon Lax, a former investment banker and venture capitalist who is now CEO of online lender Revenued.

"When selling to a large institution, you are always at risk for changes in strategy, which can make you and the company you built irrelevant,” he said. “If you are in it for the money, then by all means sell. If you are either mission- or legacy-driven, it rarely accomplishes what you set out to achieve."

Bank regulators issued long-awaited guidance in June on how financial institutions should approach third-party relationships, such as tie-ups with fintech firms. 

The guidance, issued by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., outlines best practices to "identify, assess, monitor, and control" relationships with third-party providers, and replaces each agency’s existing guidance on the topic.

Aimed at helping banks address the operational, compliance and strategic risks that come with third-party tie-ups, regulators said the document rescinds and replaces the Fed’s 2013 guidance, the FDIC’s 2008 guidance, and the OCC’s 2013 guidance, as well as a set of frequently asked questions the OCC published in 2020.

While regulators said the new text promotes consistency and clarity in their third-party risk management guidance, they emphasized that it does not impose any new requirements on banking organizations.

Regulators acknowledged that not all partnerships warrant the same level of oversight, noting "not all third-party relationships present the same risks."

“[A]s part of sound risk management, it is the responsibility of each banking organization to analyze the risks associated with each third-party relationship and to calibrate its risk management processes, commensurate with the banking organization’s size, complexity, and risk profile and with the nature of its third-party relationships,” the guidance said.

Regulators said banks have flexibility in their approach to assessing the risk posed by each third-party relationship.

“To reinforce this flexibility and provide clarity on third-party risk management implementation, especially for community banking organizations, the agencies have streamlined and simplified certain sections of the guidance,” according to the document.

The joint guidance comes as the growth of banking-as-a-service and fintech partnerships in the banking sector have grabbed the attention of regulatory agencies in recent years.

Michael Hsu, the OCC’s acting chief, called out the complex nature of bank-fintech partnerships in a speech last year, saying the ventures could put the financial system at risk of a crisis if not properly supervised.

The Treasury Department in November 2022 said more oversight of the fintech sector and bank-fintech partnerships is needed to protect consumers and enable sustainable competition in the financial services industry.

Regulators described the new guidance as “principles-based,” which can be adjusted to the unique circumstances of each third-party relationship. 

“The agencies do not believe it would be appropriate to prescribe alternative approaches or to broadly assume lower levels of risk based solely on the type of a third party,” the guidance said. “For example, while a third-party relationship with an affiliate may have different characteristics and risks as compared to those with non-affiliated third parties, affiliate relationships may not always present lower risks. The same is true for third parties that are subject to some form of regulation.”

In cases where a bank may not be able to gather certain information on potential partners — due to the firm’s brief operational history or existing policies against sharing information — regulators advised banks to obtain alternative information on the company, consult with industry utilities or consortiums, or consider using a different third party. 

The guidance also encourages banks to consider the strategies and goals of a potential third-party firm, as well as its ownership structure, financial condition and incident reporting procedures. 

An evaluation of the volume and types of subcontractors that a third party relies on also helps inform whether such arrangements pose additional or heightened risk to a bank, regulators said.

The guidance also encouraged firms to monitor third parties on an ongoing basis, and to direct-test the third party’s controls.

Regulators removed a part of the guidance pertaining to exclusion of customer relationships — a departure from the third-party risk management rules proposed in 2021. That move met criticism from FDIC Vice Chair Jonathan McKernan.

In a statement, McKernan said the change, which was intended to reduce ambiguity, does the opposite. 

“In my view, the exclusion’s removal itself creates ambiguity. The final guidance is now unclear as to whether or when it applies to arrangements involving depositors, borrowers, or other customers of traditional banking services,” he said.

The guidance did not receive support from Fed Governor Michelle Bowman. 

Bowman, who said the Fed's "past third-party risk management guidance was supplemented by several implementation aids and tools," said the new guidance fails to mitigate regulatory burden on smaller institutions.

“Regulatory guidance can play an important role in promoting risk management practices by encouraging dialogue between the bank and its examiners and by establishing reasonable and clear supervisory expectations,” she said in a statement. “Although this guidance suggests that a sound third-party risk management framework should be appropriately tailored to a bank's level of risk, complexity, and size, it does not provide the necessary clarity or supplemental tools to facilitate small bank implementation.”

Meanwhile, at least one trade group has come out in support of the newly released joint guidance. 

“We applaud the Federal Reserve Board, FDIC and OCC for taking a coordinated approach to provide clarity for banks looking to adopt leading technologies and partner with related third parties,” Penny Lee, CEO of the Financial Technology Association, said in a statement. “Today’s guidance acknowledges the benefits that third parties like fintechs provide and offers a constructive framework to mitigate identifiable risks, including for smaller banks that may face unique challenges in this context.”

Elon Musk in July unveiled a sweeping rebrand of Twitter, the social media site he acquired last year for $44 billion.

The billionaire replaced the platform’s iconic bird logo with an ‘X,’ the site’s new name and reflection of his mission for the site to morph into an “everything app.”

It appears Musk wants banking and payments to play a central role in the platform’s revamp. He told employees in November 2022 that he wanted users to maintain a cash balance on the platform in a move that would turn the site into “the people’s financial institution.”

While vague, the platform’s CEO, Linda Yaccarino, reiterated X’s financial ambitions in a July post.

“X is the future state of unlimited interactivity — centered in audio, video, messaging, payments/banking — creating a global marketplace for ideas, goods, services, and opportunities,” she wrote. “Powered by AI, X will connect us all in ways we’re just beginning to imagine.”

The rebrand harkens to Musk’s payments origins. The entrepreneur co-founded online bank X.com in 1999 before it merged with another business to become PayPal.

But how should banks view Musk’s ambitious plans for X? The tech entrepreneur’s intent to bring the social media platform into the banking and payments landscape presents both opportunities and risks for traditional banks, experts said.

Fear of missing out

Banks should be eager to seek partnerships with X, said Joe Camberato, CEO of fintech marketplace National Business Capital.

“If banks hesitate, competitors could jump in and seize the opportunity, or X might develop these services on its own,” he said. “Elon Musk's determination and track record of overcoming obstacles — just look at Tesla and SpaceX — make it clear that he doesn't back down from challenges."

Musk has not shed light on the potential depository nature of X. Many nonbanks that offer bank-like services partner with legacy institutions to do so, leveraging a firm’s charter and regulatory expertise to offer consumers standard bank products and Federal Deposit Insurance Corp. insurance.

It’s not clear if X’s quest to become “the people’s financial institution” will encompass a bank partnership or an attempt to gain its own bank charter. 

Banks looking to benefit from the former option, however, should exercise caution, Camberato said.

"Interested banks should be cautious about understanding the nature of their partnership with X, whether it's for the long or short term,” he said.

Potential partner banks should be prepared for the possibility that X could eventually develop solutions independently, leveraging better control, economics and technology, he said. 

“Banks tend to move slowly, and might not be as tech-savvy as X, so they should be ready to adapt swiftly and collaborate in order to capitalize on any potential partnerships,” Camberato said.

Some banks might be enticed to partner with the platform if it maintains a high level of users and gains consumer and public trust, said Joe Davey, a partner at technology consulting company West Monroe Partners.

Davey, however, said he doesn’t think the platform poses a significant threat to traditional banks. 

“Right now, it is safe to say the only banks that would want to partner with X are those that are addicted to risk or based in countries sanctioned by [the Office of Foreign Assets Control],” he said. “Given the instability of the company and its leadership, there is very little for banks to hold onto. At best, it will emerge as a friendly e-commerce enabler that won’t steal their deposits or lure away clients.”

Winning over regulators

Adding financial services products to X will be an uphill battle for Musk, who will likely face challenges obtaining regulatory approvals, charters and licenses in all states, Davey said.

The San Francisco-based firm has applied for money transmitter licenses in every U.S. state and territory, according to a filing with the Financial Crimes Enforcement Network.

So far, the company has obtained money transmitter licenses in eight states, according to Payments Dive. 

Musk has told investors he’s aiming to earn $1.3 billion in payment revenue by 2028, according to the Financial Times.

“Like any traditional bank or payments platform, they would be regulated by the Federal Reserve and must comply with payments standards operated by the Fed or [Office of the Comptroller of the Currency] as a bank,” Davey said.

Musk’s lofty vision for the platform means it will likely fall under the purview of multiple government agencies, he added.

“Given the breadth of the X vision, it is probably easier to say what agency will not regulate it,” Davey said.

There’s also the artificial intelligence component to X’s plans. The firm’s goal to offer financial services products “powered by AI” could further increase regulatory scrutiny amid growing calls for agencies to craft guardrails around the development of the technology. 

“The banking sector is heavily regulated in terms of licensing and compliance,” Camberato said. “[Musk] will have to collaborate with the right partners and navigate the approval process. While AI is already being used and tested by banks, any new financial services backed by AI may undergo scrutiny from regulators."

Tough road ahead?

Other large tech firms have tried to fold financial services products into their platforms in an attempt to deepen relationships with existing customers and draw new ones, but with little success.

Facebook’s cryptocurrency project, Diem, formerly known as Libra, faced global backlash from regulators and politicians, when it was announced in 2019.

Amid widespread criticism, the project’s partners, including Stripe, Mastercard and Visa, dropped out before Meta CEO Mark Zuckerberg’s plans to bring cross-border remittances to the social media site were realized. 

Silvergate Bank, which had agreed in May 2021 to be the exclusive issuer of the Diem USD stablecoin and to manage the currency reserve, ended up purchasing the Diem Association’s assets last year for $182 million. 

The La Jolla, California-based crypto bank shuttered operations in March, following months of financial turmoil. 

Google has also tried to break into the banking arena. The company in 2019 unveiled a plan to offer consumer checking accounts in partnership with Citi and Stanford Federal Credit Union. The venture garnered partnerships with nine more firms before the tech giant ultimately abandoned the project.

Bank of America launched an accelerator program for early-stage fintech startups, the Charlotte, North Carolina-based bank announced in May.

The six-month program provides mentorship, networking opportunities and access to potential investors to Black, Hispanic-Latino, Native American and other entrepreneurs from underrepresented communities, the bank said. 

The bank is offering the program, called Breakthrough Lab, at no cost. Participants are not expected or required to exchange equity with the bank, the firm said.

The launch comes after Bank of America tested smaller versions of Breakthrough Lab in 2021 and 2022.

Bank of America launched a pilot program with five startups from the New York area in 2021. The bank said it expanded the pilot in 2022 with 17 companies from the U.S., Mexico, U.K. and France.

“The bank’s long-standing commitment to supporting economic opportunity for people and communities we serve is at the core of Bank of America Breakthrough Lab,” Rina Arline, Breakthrough Lab program director in global transaction services at Bank of America, said in a statement. “We’re excited to play a role in giving emerging entrepreneurs from a range of backgrounds access to the bank’s vast resources and industry networks.”

Bank of America said it plans to host a new cohort each year, and is looking for pre-seed stage fintech companies or firms with tech-enabled ideas promoting inclusion such as healthtech, wealthtech, edtech and housing. 

“While the aspirational goal of the program is to increase access for underrepresented groups, all eligible entrepreneurs regardless of background are encouraged to apply,” the company said in a statement.

The six-month part-time program runs from September to March, and includes 94 hours of live instruction. 

Each cohort will be assigned mentors at Bank of America’s managing director or executive level, the firm said. Participants will receive technology support, a branding package covering website and logo design, and guidance on partnering or selling to a large company.

At the end of the program, each cohort will be able to pitch to potential investors, the bank said.

A new $70 million fund, launched by Wells Fargo, fintech Hello Alice and the Global Entrepreneurship Network, aims to provide small-business owners with capital and access to credit to scale their companies.

Wells Fargo is providing the initial capital for the fund, which will be deployed over the next five years. The fund is part of Hello Alice and GEN’s Equitable Access Program, which, through a partnership with Mastercard, provides small-business owners with access to credit and financial education.

The fund will provide credit enhancements, including guarantees, loan-loss reserves and cash collateral deposits to banks to enable them to increase their risk tolerance and help underserved and credit-challenged small-business owners access credit, the companies announced in June.

The fund follows the April launch of Hello Alice’s business health score tool, which, according to the company’s co-founder, Elizabeth Gore, allows small-business owners to take a “gamified approach” to improving their financial health.

“We know traditional credit scores are important, but we wanted to look at the whole of the business,” Gore said during a panel discussion at the National Press Club in Washington. “What is your cash flow? What is your credit, what is your employee makeup? In about six minutes, we can tell you the financial health of your business in a 0-100 score.” 

The tool also educates small-business owners on how they can improve that score, such as by separating one’s personal and business credit or applying for a small-business loan, Gore said.

Hello Alice worked with GEN, Wells Fargo and Mastercard to understand the data infrastructure needed to help small businesses access secured credit by leveraging their business health score tool, Gore said.

“Our macro objective is to unlock — with $70 million in grants — $1 billion dollars in credit,” Gore said. “There's a $40 billion gap in the [Black, Indigenous and people of color] community alone for those who apply and are declined business credit. Our goal is to really crack that open. And it's a great business opportunity.”

Lack of access to capital and credit is the No. 1 challenge for small businesses, Otis Rolley, president of the Wells Fargo Foundation, said on a separate panel.

“And we know [small businesses] also need technical assistance and support,” he said. “That's why we're really excited about both the [business health score] tool and the fund: It’s that opportunity to provide these small businesses with the resources to be successful early on.”

The philanthropic venture also gives Wells Fargo the chance to take a flexible approach to solving the small-business credit issue, Rolley said.

“Something is clearly broken,” he said. “And it's going to take us rethinking how we think about credit and how we think about underwriting, and that's one of the exciting things about philanthropic dollars.

“I can take a little bit more risk, and the philanthropic side can explore, innovate and go different ways, because there are not the same regulatory rules that affect not just us, but all banks,” Rolley said.

Newtek Bank saw a 121% increase in deposits since December after partnering with fintech Apiture’s digital banking platform, according to a May company announcement.

Newtek One Inc. acquired the National Bank of New York City in January and renamed it Newtek Bank. Following the transaction, the lender rolled out its digital account-opening solution with Apiture, a Wilmington, North Carolina-based firm, and began promoting digital banking in March.

Of the $170 million in client deposits the bank gathered in March and April, more than $115 million came from the digital platform, Newtek CEO Barry Sloane said in a statement.

The bank is already in the payment processing, payroll solutions and insurance agency business. It also manages people's hardware and software and makes loan payments, Sloane said.

“We are going to be working with Apiture to create front-end interfaces that make it a lot more user-friendly for the customer without the use of branches, bankers, brokers and [banking development officers],” he said.

Financial institutions need to understand that hundreds of bankers are not needed to raise deposits, Sloane said, adding that fintechs like Apiture can help. 

Apiture’s embedded banking components, which take application programming interfaces and embed them within Newtek’s dashboard portal, helped the lender use the fintech’s core servicing products. This also helped expose those APIs through Newtek’s portal offering, which gave the bank the flexibility to offer services in a way it wants, Apiture CEO Chris Babcock said.

A financial institution’s data can drive insights into a bank’s marketing campaign and help it better understand customers, Babcock said. The high interest rate can be a good time for banks to enhance their digital services, which in turn is beneficial for fintechs, he said.

“Sometimes, a challenging macro environment can actually create opportunity, and we think this is this is one of those times,” Babcock noted.

Apiture in April launched Business Insights, a new cash flow forecasting feature with the integration of the Monit platform, and also entered into a partnership with Neural Payments, a peer-to-peer payments service for banks and customers.

Managing partnerships

“I think that we clearly understand the challenges of banking and technology because they really don't go together,” Sloane said. “You have got a regulatory aspect. You have got legacy people in these organizations that make the battle uphill. They are resistant to change.”

Many fintechs provide software without acknowledging that there is an operational process behind it for the client experience, Sloane said. 

For smaller institutions, it is not always the technology challenge that becomes the hurdle, Babcock said. Instead, it is the challenge of managing all the relationships involving the different fintechs — a space where Apiture steps in to help, he said.

“We have the relationships with the fintechs integrated into our product and then give that overall solution to the institution,” Babcock said. “So, that positions us really well to be able to continue to grow, and we continue to see a lot of activity in the market. Even though the macro conditions are challenging for some of these banks, that actually creates a need for upgrading their digital solution.”

BNY Mellon and financial empowerment fintech MoCaFi have partnered to bring payment options and banking services to unbanked and underbanked Americans, communities that make up 5.9 million and 18.7 million U.S. households, respectively.

The treasury services arm of the nation’s oldest bank will now provide federal, state and local governments, and corporate clients with a digital disbursement payment service, through its Vaia platform, which will allow the entities to distribute payments to unbanked individuals, or those without bank accounts.

This means governments will be able to pay out disaster relief payments digitally, in real time, to unbanked residents. BNY Mellon’s corporate clients will be able to pay their unbanked employees in real time, too.

For example, if a government agency needs to distribute payments to residents, that agency would provide residents’ information to BNY Mellon’s Vaia platform, which would direct the agency to the solutions offered by MoCaFi. MoCaFi would then send each resident a text or email with an enrollment code informing them that an account has been created for them and instructing them to download the MoCaFi app. The resident would enter the enrollment code into the app and be presented with immediate access to their money in the form of a digital payment card — complete with a 16-digit account number, CVC code and expiry date. An identical physical card would be sent to them in the mail, but the digital card would be available immediately.

“Once you have that pipe, [the agency] can put recurring payments in the account,” said Wole Coaxum, who founded MoCaFi in 2015 to bring the nation’s unbanked and underbanked into the fold of the financial system.

While unbanked means someone doesn’t have a checking or savings account, underbanked means they don’t have sufficient access to financial services, such as loans, beyond having an account.

For BNY Mellon’s corporate clients, Treasury Services CEO Jennifer Barker told Yahoo! News that a large grocery store, for example, might have a portion of unbanked workers — workers more likely to cash their checks at predatory check cashers, who charge a fee for each check cashed. These people would also be brought into the financial fold through the BNY Mellon-MoCaFi partnership.

Coaxum started the company as Mobility Capital Finance in 2015 to address the racial wealth gap, following the 2014 social uprising tied to the death of Ferguson, Missouri, resident Michael Brown, who was Black.

Black and Hispanic householders were significantly more likely to be unbanked than white households, the Federal Deposit Insurance Corp. found, with 11.3% and 9.3% of Black and Hispanic households, respectively, not having a bank account, compared with 2.1% of white households.

When Brown died, Coaxum was the head of sales and segment for JPMorgan’s business banking arm.

“The death of Michael Brown reminded me of the footage I saw in the civil rights documentary ‘Eyes on the Prize,’ which really captured the uprising around 1967-68. I thought to myself, ‘It’s 2014 and the Black community is fighting the same battles as in 1967-68. I felt like I was very fortunate to have the training to address these issues, and that I wanted to get into the game,” he said.

“The social justice framework from the death of Michael Brown — it needed an economic agenda to go with the social justice agenda. I felt I could really use my time and resources to lean into the economic justice agenda,” he said. “I’d much rather in my life try to tackle a problem and fail than to look back and to have not even tried.”

Income and education also correlate to whether a household is unbanked, the FDIC report shows.

Households with an annual income of less than $15,000 are the most likely to be unbanked, at 19.8%, and the percentage of those unbanked changes drastically as household income goes up. For households making between $15,000 and $30,000 annually, 9.2% are unbanked. For households making $75,000 or more, just 0.6% are unbanked.

And while 6.8% of households with a high school diploma are unbanked, 19.2% of households with no high school diploma are — and for households with a college degree, that number goes down to 0.9%.

A potential BNY Mellon-MoCaFi partnership had been in the works since 2022. Engaging the unbanked and underbanked has long been a challenge for the government and business entities BNY Mellon serves, Carl Slabicki, the bank’s co-head of global payments, told Banking Dive via email.

“Given MoCaFi’s focus is to engage, enroll, facilitate payments and offer incremental financial services to those individuals, it was a ‘win-win’ for all collective stakeholders to pair BNY Mellon’s industry scale disbursements offering for government entities and businesses to pay and drive traffic to MoCaFi’s platform, to help further accelerate adoption and the ability for those individuals to safely receive their funds and bring them into the financial services eco-system through registration with MoCaFi,” Slabicki said.

The BNY partnership allows MoCaFi to play in a larger space and have a positive financial effect on more people — particularly, communities of color. But it isn’t the fintech’s breakthrough with one of the nation’s largest banks. MoCaFi inked a deal with Wells Fargo that allows users to access the bank’s ATMs for free. The fintech has also disbursed at least $100 million in guaranteed income, emergency rental assistance and other cash assistance programs.

MoCaFi made Forbes Fintech 50 and Fortune’s Impact 20 in 2021, and the company recently raised a $23.5 million Series B round. Coaxum said MoCaFi will use the funds to further its mission of helping underserved communities create wealth through better access to public, private and social capital. 

U.S. Bank’s 2021 acquisition of TravelBank, a travel and expense management fintech, has given birth to its first collaborative launch: a middle-market-focused commercial rewards card.

The new card “definitely delivers on one of the strategic intents” the bank had with the acquisition of TravelBank, one of a handful of moves it’s made since 2019 to optimize expense management for corporate clients, said Dan Skaggs, U.S. Bank’s head of middle-market bank-card product.

There was a gap in the marketplace, Skaggs said. Small businesses with a couple of hundred employees start to experience bigger problems and bigger needs — including expense management issues — as they scale and grow, he said.

What’s available to growing small businesses now is too simplistic, Skaggs said, with many companies relying on Microsoft Excel and emailed photos of receipts. Meanwhile, the expense management solutions available to larger businesses are “extremely complex [and] their user interfaces are very dated,” making them not the right fit for the emerging middle market, he said.

The all-in-one card, expense and travel management solution, launched in June, aims to help automate expense management, control spend and earn rebates on expenses for businesses with between $10 million to $150 million in annual revenue.

The need is there: Roughly seven in 10 CFOs said they believe travel and expense management absorbs more of their finance teams’ time and attention than it should, according to a survey of 150 finance executives by CFO Dive this year.

TravelBank CEO Duke Chung said remedying that issue was exactly what he and his co-founder Reid Williams set out to do in 2015.

“By joining forces with one of the leaders in corporate payments, we’re making that vision a reality,” Chung said. “Both TravelBank and U.S. Bank have deep experience serving emerging middle market companies, and we’re confident the Commercial Rewards Card will help them continue to grow.”

Businesses that use U.S. Bank’s commercial rewards card product can issue cards to multiple employees, with no annual fee and no card issuance fee, and set both dynamic card controls and customizable travel policies.

“Maybe [for one person] we're going to be a little more lenient, and we'll let [them] spend at certain types of merchants or certain types of retailers. But for [another person], they can only go to, let's say, Staples, or go buy supplies on it. You have that complete kind of control over the card,” Skaggs said.

With every swipe of the card, employee expenses are automatically reconciled, leaving no one with the clunky responsibility of Excel expense reports and emailed receipt photos, he said.

As for the future, Chung said TravelBank and U.S. Bank would be partnering with the bank further on delivering value to emerging market clients, though he neglected to share details.

“Another thing that's really exciting is by bringing together the products, we're also able to bring together a lot of data … and we think the data is really powerful for these businesses to make better decisions moving forward,” he said. “The card data, the expense data, the travel data — we're looking at a lot of that and using our experience around fintech to help [U.S. Bank] accelerate the momentum of innovation.”

Dama Financial is looking to more than double its portfolio of sponsor banks by as early as the end of the year, said CEO Patrick O’Boyle, who joined the cannabis banking-focused fintech in February.

The company, which has sponsor bank partnerships with five financial institutions, helps businesses in the cannabis industry, such as dispensaries and cultivation centers, secure banking and payments services.

Dama Financial’s network of sponsor banks hold the deposits for cannabis-related businesses which, due to conflicting state and federal laws, often operate outside of the banking sector.

While 21 states and Washington, D.C., have legalized cannabis for recreational use and 37 states allow it for medical use, cannabis is still listed as a Schedule 1 drug under the Controlled Substance Act, along with ecstasy, heroin and LSD. The illegality of the drug at the federal level means most banks are reluctant to service the industry.

But, for the banks that are open to serving the space, Dama Financial helps facilitate what can largely be a compliance-heavy and high-risk program.

“We have a fintech and compliance layer that we can wrap around the bank to take on and manage the majority of that risk,’ said O’Boyle, who, prior to joining the San Francisco-based company, was senior vice president of Talus Pay’s banking partner division. “We interface with the customer and offer that expert customer support, so that the bank can benefit from still getting the depository piece of the relationship.”

Dama Financial has three levels of bank relationships: payments, sponsor and referral, O’Boyle said. Through a payments partnership, Dama Financial uses its relationship with a particular bank to ride the Federal Reserve’s payments rails. 

Sponsor banks agree to hold deposits from Dama Financial’s cannabis clients. By contrast, referral banks — firms that do not bank cannabis clients — point cannabis-related businesses toward the fintech’s services. 

“[Referral banks] want to be able to work within their community, and they want some benefit from having that relationship, but they're not ready to park deposits right now,” O’Boyle said. 

Part of Dama Financial’s strategy to grow its network of sponsor banks is through its existing referral relationships, O’Boyle said.

“That’s the evolution: Start as a referral bank and move to sponsor bank,” he said.

Dama Financial’s plans to expand its sponsor bank network come after it made the decision to pare the network from seven to five several years ago, mainly due to a scaling issue, O’Boyle said.

“We found a solution that was a little harder to scale from a payments perspective. But we're getting that much more scalable,” he said.

Meanwhile, O’Boyle, like many other stakeholders in the cannabis and banking spaces, are eagerly awaiting the passage of legislation that could make the idea of banking cannabis firms more palatable to some financial institutions. 

The bipartisan Secure and Fair Enforcement (SAFE) Banking Act would make it easier for banks to serve legal cannabis-related businesses.

The bill has passed in the House seven times, but has yet to pass in the Senate, where, according to Politico, Republican and Democratic lawmakers are in a stalemate over some of the text’s details. 

“I think [SAFE Banking] gives us much more opportunity to be involved with more banks and grow our banking relationships even more,” O’Boyle said. “They're still going to need a compliance layer that helps to isolate or insulate them a little bit from this risk area. Look at how few banks support the liquor industry. I think it's always gonna be an area of high compliance and I think it plays extremely well for Dama’s one piece of our business, our banking and financial service access piece.” 

Beyond banking

Dama Financial was founded in 2017 with the aim to help cannabis businesses gain access to banks, an issue that has plagued the industry since California became the first state to legalize the drug for medical purposes in 1996.

But Dama Financial’s ambitions extend beyond just facilitating the depository relationship for cannabis firms, O’Boyle said.

The longtime payments veteran said he wants the fintech to become a complete business solution provider for the cannabis industry. 

“Our goal is to provide not only access to banking services, but integrated [point of sale], both a retail and wholesale seed-to-sale solution,” he said. “[Cannabis businesses] don't have to play integrator themselves. ... We can handle it all.”

Data-aggregating fintech Plaid launched a network to help banks and fintechs identify and combat instances of repeat fraud, the company announced in June.

The collaborative anti-fraud network, dubbed Beacon, is “designed to stop the chain reaction of fraud that occurs when identities are stolen and accounts are compromised,” the company said.

Participating members can report instances of fraud via Beacon’s application programming interface or Plaid’s dashboard, the company said. Contributors can screen new sign-ups or users against the Beacon network in real time to detect whether a specific identity has been associated with certain types of fraud, Plaid said.

Similar to how banks have access to shared fraud intelligence, Plaid said it wants to bring that same technology to fintechs and banks. 

“Plaid sits at the center of the multi-sided digital finance ecosystem — spanning banks, credit unions, thousands of leading fintech apps, and millions of consumers,” Alain Meier, Plaid's head of identity, said in a blog post. “With Beacon, we are uniting the ecosystem to share fraud insights across digital finance providers and create a mechanism to verify if personal identifiable information has been abused, reused or recycled across platforms.”

U.S. consumers reported losing nearly $8.8 billion to fraud in 2022 — an increase of more than 30% over the previous year, according to the Federal Trade Commission.

The launch of Beacon follows several other product rollouts that expand Plaid’s offerings beyond bank data aggregation.

The company last year launched a feature that fast-tracks verifications across Plaid-powered apps and services. The firm has billed the service as a “one-click checkout” for identity verification that is compliant with know-your-customer standards. 

The fintech in October 2022 launched Signal, a product that uses machine learning to assign a risk score to Automated Clearing House payments. Since Signal’s launch, Plaid said it has tripled its monthly processing volume and protects more than $2 billion in transactions per month across banks, crypto exchanges and wealth platforms.