5 Tips for Handling Fintech Partnership Contracts

Simple mistakes when contracting with fintech partners can lead to headaches. Better upfront contract negotiations and precise language can prevent such missteps for any bank negotiating new vendor contracts or looking to add additional technologies with an existing fintech partner.

Most community banks use contracts provided by the fintech they’re partnering with, but a one-size-fits-all contract is usually geared to the fintech’s interests rather than the bank’s, says Ryan Rackley, who’s a partner at consulting company Cornerstone Advisors and leads the firm’s contract negotiations solutions group. That’s why it’s so important for community banks to get the nuts and bolts of a contract right. “Banks need to protect their interests in case things go wrong,” he says.

Here are five things to know about constructing fintech contracts that will help avoid costly errors or conflict.

1. Set expectations upfront

Community banks sometimes leave too much negotiation for after the first draft of a contract, but this adds unnecessary time and complexity, says Charles Potts, executive vice president and chief innovation officer for ICBA. A better practice is to make expectations clear to the fintech at the onset of discussions.

This includes setting expectations for technology, integration, data security, compliance, customer data, audit provisions and service levels. “The more the bank leaves out of the expectation-setting in the sales process, the more redlining has to happen,” Potts says. 

Pricing is another area that needs to be discussed upfront and firmed up contractually. The more the bank understands every possible charge it could incur, the better the partnership will work in the long run, says Mackenzie Bressie, head of operations at Finli, a fintech that helps banks improve lending decisions, grow deposits and increase noninterest income. “Nothing derails a partnership faster than unexpected charges,” she says.

2. Get on the same page for terms and definitions

Certain terms may mean different things to a community bank than they do to a fintech, which can cause confusion on both sides. For example, to a community bank, the term “integration” might mean that a customer logs in, gets authenticated and has a white-label experience. To a fintech, however, it could mean something more technical, such as data moving seamlessly between the bank and provider, says Lori Shao, founder and chief executive officer of Finli. “I think we probably wasted a good three months doing a lot of integrations only to learn after the fact that it wasn’t what any of the banks wanted,” says Shao. 

3. Sweat the small stuff

Fintech contracts often touch broadly on critical components such as data sharing, audits and service expectations, but they may leave out important details that can leave a bank vulnerable. It’s important to put “meat and substance into the contract,” Potts says.

For example, contracts should explicitly mention the community bank’s right to have an outside audit at the fintech’s expense, as well as an agreed-upon escalation framework in the event of a dispute. 

Contracts should also spell out clearly that the bank has access to shared customer data like customer profiles and transactions, says David Robinson, director of fintech partnerships for $2.7 billion-asset Academy Bank in Kansas City, Mo. Setting this out contractually ensures that the bank doesn’t have to ask for certain types of data; it just “gets ready-made access,” he says.

Robinson offers the example of the collapse and bankruptcy of banking-as-a-service fintech Synapse and the ensuing frozen funds as a reason that banks should push for contractual access to important customer data. “That incident is informing a lot of parties that are in this business, along with the regulators,” he says.

4. Include a service-level agreement

A service-level agreement sets out clear expectations and detailed remedies that have teeth in case the fintech’s service doesn’t meet the bank’s requirements. 

Many contracts have service-level agreements, but they are too vague, Rackley says. For instance, the contract may say that the fintech is expected to be up and running 99.9% of the time, but it won’t spell out how that’s measured or implement reporting mechanisms. “It’s a hollow service-level agreement,” he says.

Contracts should clearly state how a fintech company will fix identified issues and set out a time frame for doing so, says Tom Kientz, chief operating officer at Academy Bank. The contract should also clarify next steps if the bank remains dissatisfied.

5. Insist on exit clauses

Many contracts don’t have exit clauses, but that can put a community bank in hot water. If there’s no provision to exit mid-contract, for example, the community bank might end up paying for more years of service than it planned for, Rackley says. This can be particularly sticky if the fintech can’t meet a key milestone and the bank has to find another provider unexpectedly. 

Setting up provisions in advance mitigates the risk of unwanted termination penalties, says Rackley. He emphasizes that the contract should also make clear about continuing service-level expectations once the bank gives notice that the contract is going to be severed. In the end, a community bank will be in great shape if it takes these extra precautions.