Fintech Partnerships: A Much-Needed Lifeline for Community Banks, Credit Access

By Kirk Chartier, Chief Strategy Officer 

America’s economic success is largely driven by small businesses, which are, in turn, financed by community banks that, according to the FDIC, combine relationships with good old-fashioned underwriting to support business growth.

Over the past twenty years, the number of FDIC-insured banks has declined by nearly half.  The majority of the loss has been from the rank of community banks. This reduction has come from a combination of consolidation and closures, in large part due to the expense of technology, creating an uneven playing field dominated by larger banks. Improvements in banking services driven by technology have had the unintended consequence of making the list of financing options for small businesses and consumers smaller. A growing economy requires access to dependable credit.

For community banks to serve their role in communities around the country, partnerships with service providers, especially technology companies, or fintechs, are crucial. While community banks often can’t afford to develop proprietary technology, partnering with service providers that help them expand the market they can service is affordable. Plus, those partnerships can drive innovation and promote competition. Large banks are more likely than community banks to partner with fintechs to expand their coverage of their lending area.

Community banks are typically limited in the products they offer and the markets they service by their physical footprint, balance sheet and marketing capabilities. Partnerships with fintechs can help them expand to reach market segments often just out of reach for traditional banks. Bank and fintech partnerships are becoming more common, with 40% of community banks surveyed by CSBS reporting that they believe partnership with a fintech firm will be a promising opportunity for their bank over the next five years. Federal prudential regulators have recognized these critical needs as well, with the Office of the Comptroller of the Currency issuing an update to Interagency Guidance on Third-Party Relationships: Risk Management in 2023 that specifically notes that the guidance applies to relationships with fintech.

Fintech partnerships focused on lending can help banks expand their lending reach and overall digital presence, reaching borrowers who may not be scorable using traditional underwriting methods. By using an approach like human-supervised machine-learning-powered credit assessments, banks can make lending more inclusive. Studies show fintech lenders allow small businesses to access credit at a lower cost, while they are less likely to receive credit through traditional lenders.

Fintechs can also streamline loan origination processes with a more user-friendly platform, reducing the time and resources required to approve personal and small business loans. Additionally, fintechs can factor in alternative data that can be used to assess creditworthiness beyond a traditional credit score, and they can use innovations like AI and machine learning to automate underwriting and create a more efficient lending process. In fact, research shows that fintech-powered lenders are more efficient in making consumer loans than traditional lenders operating at the same scale

Nearly half of U.S. banks are either already leveraging fintech partnerships or actively exploring them to enhance their small business lending processes. When done correctly, the benefits are immense. However, community banks must approach these partnerships thoughtfully, ensuring they select trustworthy fintech partners that align with their values and have robust internal processes in place. 

Solutions that seem too good to be true often are, and partnering with fintechs focused on the wrong incentives can expose both banks and their customers to significant compliance and regulatory risks. However, Ernst & Young research found that 64% of banks surveyed struggle to identify and prioritize partnership targets. A lack of due diligence can lead to partnerships that erode trust, harm consumers and ultimately damage the reputation of the entire industry.

To foster a more inclusive banking ecosystem that freely allows for bank-fintech partnerships to thrive, industry stakeholders, including regulators, banks and fintechs, must work together to strategically support these arrangements. This includes providing clear guidance, sharing best practices and prioritizing transparency.

Community banks drive local economies, growth and opportunity where they are needed most. By embracing responsible innovation and forming partnerships built on trust, these banks can not only survive in a rapidly changing landscape but thrive, ensuring that every community, no matter how small, has access to the tools and resources it needs to prosper.