Overview
When a corporate card fintech recently filed a Chapter 7 bankruptcy case, cards supported by that fintech apparently went dark almost overnight. For the company’s sponsor banks, the fintech’s collapse required operational cleanup and became a public crisis. That situation presents some key takeaways, outlined below, on which we think any bank that sponsors fintech products should focus. These include ongoing oversight of the fintech’s financial health, contingency planning for a wind-down, and a robust, coordinated plan for communicating with customers if things go wrong.
Despite banking regulators' increasing openness to fintech relationships, their guidance makes clear that they still expect sponsor banks to actively oversee their fintech partners. Heightened scrutiny and enforcement activity involving bank-fintech sponsorship arrangements also continue apace. Accordingly, sponsor banks should view this recent event as a learning opportunity to assess their own internal controls and their readiness to manage a similar event with their fintech partners.
Warning Signs for Banks
Distress often shows up well before a bankruptcy filing. A late-stage acquisition falling through, a sudden change in leadership, or a stalled fundraising round can all signal that a program is heading toward trouble. When those signals coincide with a bank already under heightened regulatory scrutiny, risks can compound quickly.
Lessons Learned: What Banks Should Do Now
A strong program agreement is insufficient on its own to manage similar situations. Sponsor banks should implement the following operational systems in advance to manage a wind-down if a fintech partner runs into difficulty or files for bankruptcy.
- Monitor fintech health continuously. Leadership turnover, abrupt business plan pivots, slowing growth, and failed M&A talks often signal distress in the months before a bankruptcy filing. Program agreements can help address these concerns by requiring ongoing financial disclosures and including clear escalation triggers. Beyond monitoring for distress, banks should consider building a contractual right to unilaterally suspend new activity under a program or begin an orderly transition when certain thresholds are hit.
- Create a transition plan in advance. Any program agreement should include a requirement that the parties create a transition plan if the relationship is terminated, transitioned, or wound-down. Regardless of whether a fintech partner fully participates in developing a transition plan before challenges occur, banks should develop their own transition plan, especially if a program ceases suddenly. Additionally, banks should consider running tabletop exercises that simulate a sudden program termination.
- Prepare customer communications in advance. Deposit protection, card status, and transition timelines should be reviewed regularly by legal, regulatory, and communications teams, and kept ready to deploy on short notice. Drafting these communications only after a crisis strikes is how sponsor banks lose control of the narrative, leading to customer confusion and regulatory scrutiny. When multiple sponsor banks service a fintech’s programs, a wind-down may require coordinated communication and an operational plan across sponsor banks.
- Document oversight for regulators. Examiners will likely expect a wind-down plan to include more than agreement termination and transition clauses. Sponsor banks should maintain a clear, written wind-down plan for each fintech relationship.
- Control the narrative. The sponsor bank should be the first and clearest voice that customers hear when a fintech partner fails, not the last.
Barack Ferrazzano’s Financial Institutions Group attorneys have extensive experience advising banks on fintech partnership programs from conception through transition and wind-down. Please contact your Barack Ferrazzano relationship attorney to discuss how we can help you prepare.
