Fintechs who rely on bank partnerships to provide financial services to their customers should not be beholden to a single sponsor institution, Treasury Prime CEO Chris Dean said.
A recent pivot announced by neobank HMBradley is a prime example of what can happen when a fintech relies on just one firm to handle its financial plumbing, he said.
“The bank is a single point of failure,” said Dean, who was the chief technology officer of application programming interfaces banking at Silicon Valley Bank for two years before launching software provider Treasury Prime in 2017. “Having that bank there can be a problem if the bank doesn't do what you want.”
HMBradley, a neobank that caters to savers, announced last week it is shutting down its consumer operations and shifting its focus to selling its technology to traditional banks, after failing to hit growth targets.
The firm, which had experienced rapid growth in 2021, was forced to stop taking on new accounts after its only bank partner, Hatch Bank, struggled to keep up with the growth in deposits.
“If you're at one bank and it's a good bank and a good partner, but they're not moving the way you want them to move, it can be hard to move off that bank and innovate, which is what you really need to do as a startup,” said Dean, whose company writes software seeking to simplify how fintech companies connect to banks.
To guard against scenarios where a bank may no longer be the right fit for a fintech, Dean said the largest fintechs in Treasury Prime’s network work with multiple banks.
“We're just a software company and we help fintechs partner with banks,” Dean said. “That's what we've been doing for years now, adding more and more banks, and basically, it's to solve the problem similar to HMBradley's problem. … I think if [HMBradley CEO Zach Bruhnke] — who is an A+ operator — if he had had multiple banks a couple years ago, he'd be in a different position.”
Having multiple partners can also shield against potential business disagreements, Dean said.
“You need multiple partners, if for no other reason than, if one bank kicks you out, then you have another bank to go to,” Dean said. “We've had clients who were at a bank and the bank and the fintech began having a fundamental disagreement over some business model aspects. So the bank kicked them out, which is perfectly legitimate. That's a regular thing.”
In this particular case, Dean said Treasury Prime was able to help the fintech find another bank fairly quickly.
“For some fintechs, that would be an existential threat and a terrible moment, but for our fintech, it was easy,” Dean said. “You really need at least two good partners, if you're going to do any sort of scale.”
Ultimately, the consumer segment is a tough business for neobanks, Dean said.
“Consumer neobanks are very hard and wouldn't be my first choice. Most of the fintech activity Treasury Prime sees is enabling complex commercial transactions, not a neobank that is trying to pretend to be a bank,” he said. “There are a lot of banks in the U.S., so there’s a lot to compete with. And they have better margins than a neobank does.
“The lesson for fintechs? The HMBradley product was great, the operators were great, and they couldn't do it,” Dean added. “Maybe you should think of a different problem.”
