Sponsor Bank Due Diligence Process
  • 23 Jan 2023
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Sponsor Bank Due Diligence Process

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Introduction

Prior to onboarding and partnering with a Company, Sponsor Banks need to conduct due diligence to understand the 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

Overview of the Due Diligence Process

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. Note that 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.

We then 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. 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.

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 the Sponsor Bank from paused launches or even failed partnerships that can occur from a misunderstanding of the Company’s business model and associated risks.

Due Diligence Items & Documentation

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. Profile Form - A questionnaire that covers topics such as the Company's management team 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 the Company’s financial products. It is important that these questions are answered to the best of the ability and knowledge of the Company 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 the Company's management and corporate philosophy. Check out our article for more resources regarding pitch decks and business plans.

  3. Solution Summary - A clear explanation of the solution / products requested including a funds flow of how money will move between the Company, Sponsor Bank, and its customers. This helps the Sponsor Bank understand the Company’s 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 the Company on this summary.

  4. Financial Statements (2 year) - For Companies that have operated for over a year, the ability to provide financial statements is important to convey the financial condition of the Company. Financial statements generally include at least an income statement and balance sheet. They are a helpful measure of the Company's 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 the Company’s 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 the Company's size, sophistication, and product complexity, additional materials may be required such as legal opinions to assert that the Company’s products meet state laws or securities law (e.g. certain lending products). If the Company has an already established compliance program, evidence of program and policies will help evidence the maturity of the program to Sponsor Banks.

Once a Sponsor Bank shows interest in a match, additional documentation will be requested so that the Company can open an operating account with the Sponsor Bank. It also provides documented evidence supporting the initial diligence responses and creates an audit trail for the Sponsor Bank for regulatory purposes.

  1. Know-Your-Business (KYB) and Know-Your-Customer (KYC) Check - As part of the Sponsor Bank’s account opening process, the Company is required to provide information and documentation associated with the business and owners.

    1. Identification of Ultimate Beneficial Ownership (UBO) - This is collected to identify the ultimate owners of the 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 the Company (e.g. CEO).
    2. 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.
  2. Certification of Incorporation and By-Laws (or relevant documents) - This is legal proof of the 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.

  3. Employment Identification Number (EIN) Verification Letter - This is an IRS letter evidencing the Company’s registration with the IRS. This can also be called a CP 575 form.

  4. Certificate of Good Standing - This is collected to show that the 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.

  5. Previous 3 Months’ Bank Statements - The bank statements provide the Sponsor Bank with evidence of the Company’s latest cash position and how much funding has been spent.

  6. Capitalization Table - This is used to list out the 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.

  7. Evidence of any Business Permits or Licenses - Evidence of any required licensing that the 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.

  8. Description of Ownership Structure - For more complex legal entity structures, this provides a diagram or explanation of the ownership structure of the Company that is partnered with the Sponsor Bank.

  9. Background Check - The company owners and executive team may be subject to a background check for a criminal and credit check.

Meeting with Your Potential Sponsor Bank Partner

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 the business model of the Company. For instance, the Sponsor Bank partner may focus on risk and compliance topics, funding or financial condition of the Company, product roadmap, or just to get to know the 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

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