You have to play the “What If” game when reviewing bank partnership agreements for fintech companies. This game is a pressure-testing exercise, asking yourself as you read through program and platform agreements whether there is adequate contractual coverage if something big happens. Of course, you have to be judicious in doing so, recognizing you may not have leverage on certain points and understanding each party’s desire to negotiate the agreements full speed ahead.
Here are some questions that you should consider as you go through the agreements:
- What if the fintech wants to see a change made to the program after launch?
- What if the bank plans to make a material change to the program when everything is going well?
- What if a lending fintech–bank partnership arrangement gets challenged in a lawsuit or regulator action on “true lender” grounds?
- What if there is a regulator inquiry? Is the fintech’s perspective and input considered and worked into the response?
- What if the fintech wants some rights to customer data?
- What if the fintech wants to solicit customers for other products and services?
- What if the bank wants to significantly increase the required balance of the reserve or collateral account?
- What if there is an exclusivity provision that does not permit a second or backup bank?
These are all good ones, but perhaps the most important question is: What if the agreement is terminated or not renewed and the program ends? As the saying goes, “all good things must come to an end,” and the parties have to be prepared for this possibility.
Naturally, in these arrangements, users have a customer relationship with the bank for their banking product. It is also generally understood that users have a relationship with the fintech, too, and that when the program ends, the fintech should have an opportunity to transfer its users and the program to a successor bank or platform.
Program agreements should have a robust transition section that addresses transferring customers and the program. In our experience, the program agreements of many established bank partners comprehensively deal with this topic. The transition section in your program agreement, including platform agreements, should cover the following points:
- Transition plan: If the fintech has the right to transfer the program, it should take on the responsibility of drafting a transition plan, with the final plan subject to mutual agreement of both parties. Detail what the plan should contain, including an outline of each party's responsibilities, milestones, and target dates.
- Transfer agreement: The transition will likely require an agreement between the current bank and the successor bank to memorialize the transfer of the loan or deposit accounts. Outline what this agreement should cover, including any nominal consideration for the accounts and that the successor bank will assume all rights and obligations concerning the accounts after transfer.
- Timing: Allow enough time to prepare and agree to the transition plan and to complete the transfer.
- Performance standard: It is always a good idea to include a performance standard. Both parties should be required to cooperate in good faith to reach agreement on the transition plan and execute the plan, using an agreed-upon level of effort (e.g., reasonable best efforts or commercially reasonable efforts).
- Continuation of services: Incorporate provisions for services that will be continued for existing customers during the transition period and whether new customers may be taken on. Clarify that during the transition period, the parties will continue to be bound by the terms of the program agreement, including the payment of program fees.
- Communication: Both parties should be on the same page regarding communication to the public about termination of the program agreement and transition. Provide that, generally, neither party may make any public statement or communication regarding termination or transition without the advance written approval of the other party, which is not to be unreasonably withheld, conditioned, or delayed. Communication regarding termination and transition with subcontractors that are supporting the program or transition and communication with customers in the normal course should be expressly permitted. It is always a good idea to come out and say that any of this communication will not disparage the other party.
- Transition costs: Lay out how transition costs will be allocated between the parties. A good place to start is determining that if the program is terminated because a party has breached the program agreement, the breaching party shoulders the costs.
Both the bank and fintech invest considerable money, effort, and time to launch and run a program. The policy behind the parties working together to draft a solid transition section is to benefit the program customers by minimizing any burdens on them and, importantly, doing so in a way that protects the good names and reputations of both parties.
Goodwin’s Fintech Team
We practice in every fintech vertical, including lending, alternative finance (e.g., merchant cash advances, earned wage access, and factoring), payments, deposits, insurance, broker-dealers, and investment advisors. In addition to doing product and service development regulatory work, we assist our fintech clients that choose to deliver their solutions through banks in entering into bank partnership and platform agreements.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.
