Due Diligence and Matching Overview
    • 15 Nov 2023
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    Due Diligence and Matching Overview

    • PDF

    Article summary

    Introduction

    Prior to partnering with you to launch a FinTech app or embedded banking product, Sponsor Banks need to conduct due diligence to understand your company's business model and the potential financial and risk impacts of the partnership. This will ensure that the Sponsor Bank can perform the oversight needed to fulfill their regulatory requirements while also doing their part to maintain a safe and secure financial ecosystem.

    The Sponsor Bank's due diligence will generally be based on six broad areas outlined in guidance released by bank regulators:

    • Business experience and qualifications
    • Financial condition
    • Legal and regulatory
    • Risk management and controls
    • Information security
    • Operational resilience

    For additional information, Synctera has a YouTube session with our Chief Risk Officer discussing due diligence prep and a blog on why good diligence is critical for the resilience of a Banking as a Service partnership. In summary, while the process can seem scrutinizing, it is performed to protect both your business and your Sponsor Bank partner from paused launches or even failed partnerships that can occur if your Sponsor Bank misunderstands your company’s business model and associated risks.

    Overview of the Due Diligence process

    Initial preparation

    • Before meeting your potential Sponsor Bank partner, Synctera’s diligence team gathers all of the key diligence information about your business. This information is then passed to the Sponsor Bank to help them make a decision on matching. 
    • Providing these materials in a comprehensive, transparent manner will speed up the matching process and help satisfy the Sponsor Bank's risk and regulatory obligations.
    • Synctera will also meet with you to discuss risk and compliance topics and prepare you for the questions the Sponsor Bank will likely ask.
    • Synctera will help negotiate the majority of economics with you during this phase.
    • See the list of items and documentation to be provided during this phase here

    Matching

    • After the initial preparation phase, Synctera will present you to our marketplace of available sponsor banks. Synctera has more sponsor banks on our platform than any other BaaS provider.
    • Sponsor banks provide feedback to Synctera, and Synctera aggregates the interested banks. Based on Synctera's matching criteria, Synctera will facilitate introductions/conversations between you and potential sponsor bank partners.
    How does Synctera match FinTechs and sponsor banks?
    Here are some examples of the criteria Synctera uses to identify which banks are compatible with your FinTech:

    • Product and use case - Is the bank ready and willing to support your specific product/use case?
    • Risk and compliance - Is the bank comfortable with your current compliance staffing and chosen vendors for KYC/KYB, fraud, and anti-money laundering?
    • Funding and economics - Is the bank comfortable with your amount of funding, cash on hand, and burn rate? Is it economically feasible to partner?
    • Expected time to launch - Does the bank have capacity to support the launch or migration of your company in your desired timeframe?

    Meet potential sponsor bank partners

    • Synctera will work to schedule meetings with one or more of our Sponsor Bank partners where you will be able to explain the specifics about your business, such as your industry, product, and customer base. We want to ensure that the Sponsor Bank is a good fit for you not only in terms of the hard criteria, but also in terms of the desire to work and partner together.
    • The banks will typically ask many follow-up questions as they are looking to get a good grasp on your business and understand the potential risks you will generate.
    • See more information about how to prepare for these meeting here.

    Post matching

    • After mutual confirmation, a formal match is made.
    • You will need to provide additional diligence items and documentation - these items are listed here.
    • After agreements are executed, you will move on to Implementation & Onboarding. 

    Initial due diligence items before Matching

    The following items are expected to be provided by you as part of initial diligence. These materials are summarized by Synctera and provided to potential Sponsor Banks to generate initial interest. Please note that the below is a summary of key documentation, but actual requests may vary depending on your use case and situation.

    1. Company Profile Form - A questionnaire that covers topics such as your management team's backgrounds, product roadmap, target customer base, financial condition, and compliance readiness. This helps ensure the Sponsor Bank has the risk appetite and capability to support your financial products. It is important that these questions are answered to the best of your ability and knowledge to help the rest of the diligence process run smoothly.
    2. Business Plan or Pitch Deck - Clearly explains the mission, product, and target customer typically prepared for investors. It may also give the Sponsor Bank a sense of your management and corporate philosophy.
    3. Solution Summary - A clear explanation of the solution / products requested including a funds flow of how money will move between your company, your Sponsor Bank, and your customers. This helps the Sponsor Bank understand your intended products, any associated payment risks, and any implications for Money Services Business or Money Transmitter License requirements. A Synctera’s Solutions Consultant will work with you on this summary.
    4. Financial Statements (2 year) - If you have operated for over a year, the ability to provide financial statements is important to convey your financial condition. Financial statements generally include at least an income statement and balance sheet. They are a helpful measure of your historical burn rate and runway. Statements may be unaudited.
    5. High-Level Projections (3-year) - Projections provide revenue, expense, and volume estimates. Sponsor Banks need projections to understand your financial runway, even if it is just an estimate. It also projects the potential impact on the Sponsor Bank’s balance sheet such as deposit growth and transaction volume. Synctera provides a template to complete these projections.
    6. Other - Depending on your company's size, sophistication, and product complexity, additional materials may be required such as legal opinions to assert that your products meet state laws or securities law (e.g. certain lending products). If you have an already established compliance program, evidence of program and policies will help evidence the maturity of the program to Sponsor Banks.

    Topics discussed when meeting with potential sponsor bank partners

    • When meeting with your potential Sponsor Bank partner, it is an opportunity to showcase your company’s goals and objectives and to share any general expectations of the relationship.
    • The topics may vary depending on the diligence items provided and on your business model. For instance, the Sponsor Bank partner may focus on risk and compliance topics, your funding or financial condition, your product roadmap, or just on getting to know your management team better.
    • This is also an opportunity for you to ask the Sponsor Bank questions around their approach, operating philosophy, and partnership expectations.
    • Your Synctera contacts may also help you prepare for the discussion should you have any questions ahead of time.

    Below are some general areas that may be discussed:

    • Introducing the bank team and getting to know the management team better
    • Business model, customer base, and external market
    • Risk and compliance topics and diligence items provided
    • Information security and operational resilience topics such as existing data or IT architecture
    • Existing vendor relationships, particularly associated with any risk and compliance functions such as KYC or KYB
    • Any outstanding questions on the partnership model and expectations

    Switching from another provider or Sponsor Bank

    • If you have existing customers and payments volume and are in the process of exploring switching or adding another Sponsor Bank, you should be prepared to provide the following information. This will help our Sponsor Banks understand the opportunity and the request around the proposed migration. 
    • The more information and clarity that is provided, the more seamless the switch can occur as the Sponsor Bank needs to confirm their ability to support the switch.
      • Reason for making a switch - this may include product, compliance, or financial reasons. Please be as upfront as possible.
      • Existing KYC or KYB methodology including any associated policy - this should describe what customer information is collected and how it is verified during onboarding as well as any additional ongoing diligence or monitoring occurs
      • Existing customer base including deposit amount - this will help the Sponsor Bank understand the financial impact of the migration
      • Existing payment volume and sizes including fraud, disputes, and ACH return rates - this will help the Sponsor Bank evaluate payment limits and operational impact

    Diligence items and documentation to be provided after Matching

    Once a Sponsor Bank shows interest in a match, additional documentation will be requested so that you can open an operating account with the Sponsor Bank. It also provides documented evidence supporting the initial due diligence responses and creates an audit trail for the Sponsor Bank for regulatory purposes. Note that some Sponsor Banks may request this information earlier in the process.

    1. Know-Your-Business (KYB) and Know-Your-Customer (KYC) Check - As part of the Sponsor Bank’s account opening process, you are required to provide information and documentation associated with the business and owners.
    2. Identification of Ultimate Beneficial Ownership (UBO) - This is collected to identify the ultimate owners of your company, which include owners that exceed 25 percentage ownership of the company and at least one designated control person, which has decision-making abilities over your company (e.g. CEO).
    3. Identification Information - Owners are run against KYC checks, which require a copy of the owner’s government ID such as driver’s license in the US. If the owner is a non-US citizen, this includes a copy of the owner’s passport.
    4. Certification of Incorporation and By-Laws (or relevant documents) - This is legal proof of your company's incorporation, which generally includes the address of where the office is registered, the number of shares of stock the fintech is authorized to issue, and any compensation provisions relating to the board of directors or advisors. Depending on the legal entity structure, the requested items may vary.
    5. Employment Identification Number (EIN) Verification Letter - This is an IRS letter evidencing your company’s registration with the IRS. This can also be called a CP 575 form. 
    6. Certificate of Good Standing - This is collected to show that your company has filed all reports and fees with the Secretary of State's office. This is typically needed if the Company is over a year into existence or if the KYB verification does not reflect sufficient secretary of state status. 
    7. Previous 3 Months’ Bank Statements - The bank statements provide the Sponsor Bank with evidence of your company’s latest cash position and how much funding has been spent.
    8. Capitalization Table - This is used to list out your company's securities, such as common shares and preferred shares, options, SAFEs, convertible notes, and warrants. It also shows how much of each security type each investor owns, the value of their respective stakes, and their current ownership percentage. Generally, Sponsor Banks require investors that own at least 10% to be listed including any significant SAFE investors.
    9. Evidence of any Business Permits or Licenses - Evidence of any required licensing that your company has obtained such as Money Transmitter Licenses, Registered Investment Advisers, etc. Depending on the license or permit, this may simply be a number that can be publicly searched. 
    10. Description of Ownership Structure - For more complex legal entity structures, this provides a diagram or explanation of the ownership structure of your company that is partnered with the Sponsor Bank. 
    11. Background Check - The owners and executive team may be subject to a background check for a criminal and credit check.

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