Strategic Partnerships and Banking
– Christina Weaver
– Christina Weaver
In 2019, Medallion Bank decided to expand beyond its current home improvement and recreation lending businesses by building a Strategic Partnerships program. Medallion entered into its first Strategic Partnership in March 2020, and is now a lender through the loan application and servicing platform offered by Choice Payments Services.
Generally, a Strategic Partnership is a significant business relationship between two entities, formalized by a contract or agreement. It is more than a vendor relationship but less than a joint venture. At Medallion Bank, we use the term Strategic Partnerships like many in our industry use it: to describe the relationships we develop with non-bank financial services companies (including fintechs, called “non-banks” going forward) to offer new financial products and services to customers.
Many state governments require a non-bank to obtain a lending license in that state before it can offer loans to consumers, and, sometimes, to businesses who reside in that state. Each state can have unique requirements for obtaining a license, as well as rules about what sort of loans or terms a lender can offer with that license. This means to serve customers nationally, a non-bank must manage numerous licenses, maintain multiple product offerings, and juggle audits from each state government.
The legal environment for banks is a little different. For instance, Medallion Bank is a Utah state-chartered industrial bank, which means we are licensed to offer our financial products and services under federal and Utah state laws. Under Utah’s Financial Institutions Act and the National Banking Act, Medallion Bank is granted many of the same abilities as a national bank, including something called “federal preemption.” Federal preemption under the National Banking Act means a bank may charge interest at the rate allowed by the laws of the state where the bank is based, regardless of whether those rates conflict with other states’ laws. Additionally, our charter generally allows us to offer our products to consumers in Utah and across the nation without having to obtain additional state licenses.
Non-banks are also unable to obtain licenses to conduct certain types of activity, such as offering insured deposit accounts or issuing credit cards, since generally only banks are granted that authority. Partnering with a bank allows a non-bank to reach consumers or businesses broadly (even nationwide) and consistently, and in full compliance with banking laws, which ensures a better experience for the end customer.
Non-banks have disrupted the financial services industry in recent years, bringing intuitive and innovative products to meet the unique and ever-changing demands of consumers and businesses. In order to meet the increased expectations of customers and expand into new markets, banks have invested heavily in new capabilities, often related to technology. Due to the size and complexity of many traditional banks, constant and quick innovation is not always feasible. On the other hand, many non-banks thrive in rapidly changing environments and are better able to adapt quickly to customer feedback and market signals. Leveraging a relationship with a non-bank allows the bank to diversify, offer creative products, and reach underserved markets without having to directly invest as heavily in new technology or other resources.
The process differs slightly depending on the product or service being offered. Generally, when a bank partners with a non-bank to offer a closed-end consumer or commercial installment loan, the non-bank hosts the lending and servicing activities on its platform. A consumer or business applies directly on the non-bank’s website or app, and the non-bank evaluates the credit application using the bank’s defined credit criteria. If the application passes the bank’s requirements, the non-bank approves the loan on behalf of the bank. The bank then funds the loan and sends the loan proceeds directly to the borrower. If the application does not pass the bank’s requirements, the non-bank notifies the applicant on behalf of the bank.
So, how does the bank make money in this scenario? Well, even though the consumer applied for a loan through the non-bank’s platform, the loan was obtained from the bank. The bank holds the loan for a few days, then sells some or all of it to the non-bank or to another third party, and keeps a small fee for the service. The bank often retains ongoing ownership of the customer relationship, but the non-bank owns the loan (or part of it) and agrees to service it by collecting payments, etc.
A checking or savings account originated in a Strategic Partnership works in much the same way on the surface, but behind the scenes is a little more complicated. A customer applies for an account through the non-bank, which manages the app or website and acts as the service provider. However, the bank opens the account, issues debit cards or other access devices, and acts as the bank of record behind the scenes. A bank earns money from these types of partnerships the same way as it does from traditional checking accounts—by the spread between interest paid on deposits and interest charged on loans, and by other fees.
Banks often provide more protections to consumers and businesses than non-banks do. This can be due to the government regulation that applies to banks but not to non-banks, and it can also be due to other factors. When a non-bank partners with a bank, the non-bank must then follow the same laws and regulations the bank is subject to, and those are enforced by both the bank and government regulators. The Strategic Partnership allows consumers and businesses to rely on the protections of banks, while enjoying access to new non-bank technology and services, getting the best of both worlds.