Lessons in Partner Banking — Part 2: Infrastructure

I have said it before, and I’ll say it again — partner banking is not something you try. It is either a strategic focus for the FI or not. If not, numerous problems can arise, including regulatory issues, a lack of sales, and persistent partner experience issues. Infrastructure is imperative to supporting a successful partner banking strategy, and it will require investment and a focus on efficiency.

Invest

First, leadership and the Board should not assume that entry into the partner banking segment will be cheap. The best use of capital is to have a well-thought-out strategy that includes target state requirements to drive investment phases and the implementation of infrastructure investment. This will help prevent investments that do not align with the strategic direction, minimize development rework, and coordinate with projected revenue to mitigate some of the capital required for investment.

One recommendation is that as investments are made and specific teams or infrastructure are dedicated to partner banking, the FI should keep track of these and establish ways to report on the time spent on shared resources working on partner banking activities, and even report down to the time spent on specific partnerships. While investments and profit and loss may not be measured this closely at early stages, it will be invaluable to measure once the business scales further.

Bank-Owned Ledger

One consistent challenge with partner banking is managing all the transaction activity in sub-ledgers and reconciliation activities. This also impacts BSA oversight for transaction monitoring and AML requirements. The overall consensus among regulators from multiple agencies and in various States is that the FI is expected to participate in partner banking form processes and receive data that validates the sub-ledger activity and maintains updated balances and outstanding activity. Most FIs have some form of sub-ledger activity; however, the level of detail in that sub-ledger as well as the accuracy of that information over time is the areas of focus to ensure the FI can fully understand how much each end-user of each fintech holds, even without access to the entity that may be managing that sub-ledger on behalf of the partner or from the partner itself.

One way to remedy this situation is to have a bank-owned ledger that operates as a “sidecar” or “shadow” core, replicating each partner's sub-ledger. This allows the FI to accomplish multiple goals:

• Point-in-time or near real-time ledger of all partner balances and activity
• Flow of data distribution for ancillary systems used for BSA, accounting, fraud, and other activities
• Audit capability for comparison to partner ledgers during ledger oversight
• Potential “ledger-as-a-service” product for partners who are unable or unwilling to manage their sub-ledger
• More integrated and consistent controls for transactions, data delivery, compliance, and other defined risk tolerances
• More detailed view into transaction activity for reconciliation validation and research

If the FI were to choose a more modern core solution for the “side core” solution, it would also allow for more efficient and modern approaches to integration, event triggers, real-time activity, and data distribution to internal systems. The requirements will vary by FI, the products offered within their partner banking solution, and the needs of their target market; however, time and effort must be invested in building a solid set of requirements before selecting a solution to address this need. The side core is essential if a partner chooses to manage their subledger. While established players in the market are well-vetted and seasoned in managing subledger activity, partners often seek more control over this operation and potentially realize cost savings by managing it internally. This presents challenges, as most partners lack experience in managing subledgers, and the FI will require detailed oversight for this activity. To be clear, the FI will need to have detailed oversight of subledgering, regardless of whether the partner chooses to self-manage or pass it off to a vetted third party. However, partners may underestimate the work and expense that self-managing may bring, especially when it comes to meeting the FI's oversight requirements.

Automate

Infrastructure, although it may seem like a straightforward necessity, has a significant impact on the economics and efficiency of the partner banking business. The key to creating efficiencies and keeping the economics in a competitive range is to automate as much of the process as possible. There are areas where this can make a significant reduction in staffing needs, and even allow for expanding the capabilities to the core bank for its operations.

Automation is aimed at a few different goals:

1. Working on exceptions rather than looking for them
2. Removing menial tasks from staff
3. Improving oversight and management

When automating processes to ensure teams are working on exceptions rather than looking for them, look for areas where there are clearly defined criteria and teams are manually searching for items that meet those criteria. For example, in processing wires, the travel rule may apply to specific use cases. The logic used to process those wires can look for those particular cases, the criteria required for travel rule compliance, and alert if there are anomalies in any wires for exception reviews. When building the logic for automation, always ensure that you clearly document the logic, fields used, and the foundational reasoning behind the automation so that it can be presented upon request. Especially in cases of compliance, regulators may want to see and understand how these cases are handled to have confidence in the FIs’ capabilities and logic.

Removing menial tasks is often what people like to call “low-hanging fruit.” This, especially in smaller FIs, usually involves digitizing the manual functions that staff perform daily or multiple times a day. An example of this is scanning documents for review by other teams. Another example could be the delivery method for receiving documentation from partners. If an FI does not have a straightforward way to transmit data or documentation between itself and its partners, this can result in manual tasks, such as downloading from a Google Drive, saving to an internal folder, and potentially sending it to multiple internal recipients.

Improving oversight and management is the ultimate goal of the infrastructure of partner banking, generally, but it is especially true in the context of automation. Automating partner dashboards to provide real-time views into partner health, including financials, invoice payments, specific risk metrics, and other key data points, can be beneficial not only for day-to-day operations but also for management and board reporting.

While the focus has been on automation, artificial intelligence (AI) is the talk of the town and could also play a role in creating efficiencies, as well as assisting with improving the economics. In areas where there are large amounts of data, some of which is unstructured, and reviews are labor-intensive, AI can help reduce the time and resources required to process each item. Some examples include complaints, BSA alerts, and fraud monitoring. With the growing popularity of AI in the market and among investors, there are numerous examples to research for each of these, as well as additional opportunities.

Software

The need for software can be categorized into three main areas: workflow management, risk and compliance, and reconciliation. Each of these areas has unique needs, and there are many software options in the market to solve for each; however, most of the options will need customization to fit the partner banking segment and even banking generally.

Workflow management involves not only tracking the process from beginning to end, but also documenting the process, identifying who participated, and providing evidence that the process was completed. For partner banking, this also includes many cases where the partner must be a key participant in the overall process. There are several solutions in the market that offer this capability, for example, Monday.com, ClickUp, and Themis. Monday.com and ClickUp (clickup.com) can be customized to fit any broad process and are not specific to financial services, but offer a wide range of applications. Themis (Themis.com) is one of the few solutions in the market that is not only designed specifically for financial services but also has capabilities and workflows tailored for partner banking.

Risk and compliance are areas where data, reporting, and evidence are imperative for a successful program. Software will be key to organizing each process, documenting the tasks of each process, storing evidence that each process was completed, and reporting all of these to audits, whether internal or external. Software can also help with automation, send notifications to partners, and provide partners with a medium to communicate and upload documentation. These capabilities are especially valuable for issue management. Software can consolidate all comments, responses, and documentation with partners into a single location for efficient management and reporting, especially during an audit.

Reconciliation, especially in partner banking, can become quite complex. Using software to analyze all applicable values and automatically identify anomalies can create efficient processes and provide documentation on specific issues and their resolutions. This is also an area where an FI will want to analyze all requirements and examine several market options to select the best fit.

In all these instances, software solutions will require a focus on data and data delivery. The foundation of these processes will be accurate data, delivered consistently, with a complete set of required fields from both internal sources and the partner.

Now what?

Infrastructure is built based on the strategic approach and detailed with requirements from each stakeholder group and the business. It cannot be overstated how important a thorough requirement gathering process is to the success of a partner banking program. To build or enhance infrastructure to support partner banking, the FI will need to include all applicable subject matter experts in a holistic requirements gathering exercise to accomplish the goals of maintaining a subledger, automating processes, and acquiring software solutions.

Requirements gathering is, in itself, something to be managed. The FI should have program management assistance to drive and document the requirements, facilitate any request for pricing (RFP) efforts, and report progress to executive leadership and the board of directors. This will ensure the requirements are adequately documented and that the process continues to progress.

Stay tuned for the next installment that covers data.