Synctera Brings ‘FinTech As A Service’ To Community Banks

Bet your last application programming interface (API) that the strong suits for FinTechs as the year heads to a close are innovation and user experience. On the other side of the table sit the traditional community banks and the smart bet there is on risk and regulatory compliance and capital. But what if there was a platform that could bring regulatory compliance to FinTechs and a more streamlined back-end operation to legacy banks to help them better serve FinTechs? It’s a situation built for its own style of innovation and a new company called Synctera is making its own big bet on it.

Synctera is a platform that facilitates FinTech scale and encourages banks to leverage their current capabilities in new ways. On a secondary level, it matches community banks that are trying to figure out their next growth play with their tech-savvy FinTech would-be collaborators that want to enable banking services for their end customers but recognize that doing so means integrating with third parties that might not deliver the bank-grade compliance they need. The result is an effort to streamline the next generation of innovation within the banking ecosystem and bring a “compliance as a service” model to FinTechs. As Synctera CEO Peter Hazlehurst told Karen Webster, the platform model helps solve a key imbalance in financial services — namely, too many FinTechs, and too few banks with which to partner in pursuit of digital-first (or maybe digital only) banking efforts.

“We’re working with community banks that previously either hadn’t been able to participate in the FinTech revolution or are doing it, but aren’t doing it as efficiently as they would like,” Hazlehurst said. “We’re helping them build all of the things they would need to do to run effective FinTech programs.”

To that end, Synctera has launched out of stealth mode today (Dec. 8), with $12.4 million in seed funding, via a financing round backed by a consortium of investors led by Lightspeed and a few other high-profile private angel investors such as Zachary Perret, CEO of Plaid and Max Levchin, founder and general partner at SciFi VC. The company said that its platform does the “work” for banks and FinTechs as they seek one another out, and make sure they’re in compliance as they combine to bring new accounts and services and cards to users.

“Our primary customer base includes banks that have started doing the FinTech thing, but want to do it better or FinTechs that already have integrated everything and just need a bank,” he said. Hazlehurst stated that the platform model levels the playing field for smaller banks that grapple with operational or cash constraints that make it otherwise difficult to “manage” FinTechs. These banks can collaborate with FinTechs to improve their innovation and UX profile while allowing them to do what they do well, which is to collect deposits that can help drive lending programs that put money back into the community. FinTechs then get access to invaluable compliance advice, counsel and best practices. They also benefit as the pool of banks with which they can work is broadened through Synctera’s online marketplace.

The company said in a release Tuesday (Dec. 8) that its first “match” comes between Coastal Community Bank and One, a digital banking platform focused on financial wellness.

Drilling down into the mechanics of the platform itself, the marketplace brings FinTechs and banks together across a range of criteria, spanning geography, brand “ethos” and stated business goals.

At a high level, Hazlehurst noted that community banks have sought to make the transition to new digital offerings — but need help managing the billing and reconciliation aspects of their FinTech collaborations. FinTechs, on their end, have been mindful of the legal and compliance hurdles in place as they introduce FDIC-insured mobile checking, debit cards and savings accounts to customers as they need licensed partnerships to operate in the U.S. — hence the ”compliance as a service” angle.

For an example of how the marketplace works in practice: The community bank that aspires to spur growth by enabling pick-your-favorite-neobank to offer checking accounts to their end customers must have transparency and visibility into everything that happens inside of a FinTech, with granular detail on everything from onboarding regulatory disclosures to marketing documents, the minutiae that Hazlehurst said: “trip up new banks in the first stages.”

Using the Synctera platform, the bank can keep track of everything that happens at the level of a FinTech credit “dashboard” so that the bank can review each new would-be customer. If red flags are raised, the bank can send messages to the FinTech noting that more documentation is needed.

In the past, he told Webster, this type of interaction was done via <gasp> fax and phone call — and perhaps with an annual audit to make sure the FinTechs have been screening applicants.

Now, of course, digital conduits make such back-and-forth between parties more streamlined and efficient from a regulatory and compliance standpoint.

“We’re triangulating that backend and creating effectively a reverse-engineered ledger for the bank of all the FinTech’s customers,” Hazlehurst said. “We’re saying ‘here are all the transactions we think they’ve done and you may want to alert the FinTech.’ Or you may just want to take an action and say, ‘we’re going to file a SAR and be done with it and ban that user.’”

Hazlehurst explained that the Synctera model — sitting between banks and FinTechs — is to have an omnibus checking account in place. That model means that there’s one checking account that represents the sum of all the balances from all customers.

“We ingest all of the data that comes out of the FinTechs operations, whether it’s ACH processing files, or if they’re running on Galileo, it’s the RDF files, or if they’re a Marqeta, it’s all the transactions. Those can be pulled into a single set, a data lake,” he explained. The lake then becomes a mini core banking system that allows the bank to see everyday transactions and pinpoint user behavior. That’s a boon to smaller banks that may not have the infrastructure in place to tackle such tech-driven insight.

On the other side of the equation, he noted, the FinTechs can use that same level of insight to offer new financial products (such as cash back on digital cards) and reconcile balances across different accounts. The platform also controls billing cycles as banks charge FinTechs fees for access and account activity.

The FinTechs, he said, get the banking infrastructure they need without having to actually become a bank, and without the need to sign separate deals with KYC and other vendors.

“You’ll be able to come to the bank and it’ll have a comprehensive set of services. We will be providing those services via the bank,” he said (noting that Synctera and the bank enter into a 50/50 revenue share agreement).

Supply And Demand And The Data Play

As for the supply and demand that will likely crowd the Synctera marketplace, he said banks will want to deal with the well-funded FinTechs — flush with, say, $40 million or $50 million in hand — because those nascent tech firms will spend tens of millions of dollars on marketing and customer acquisition to drive customer deposits — a customer acquisition play funded by the FinTech, in other words.

“Suddenly you’ve got an inflow of a whole bunch of customers. That’s what you really want,” he said of the banks. “The banks that will wind up on the marketplace are those with strong roots in a given community across several generations — yet are becoming increasingly tech-savvy and desirous of a stronger web presence. They can then take the deposits and other accounts created through the FinTechs and lend into the banks’ own communities.”

Looking ahead, and with the wealth of data gleaned from the marketplace, Synctera will over the near term focus on risk and compliance — seeking out bad behavior, so to speak — but can conceivably help banks monetize that data (with advanced analytics) as they gain insight into consumer behavior.

For now, “we’re getting into FinTech as a service. We will provide that layer upwards to the FinTech and downwards to the bank. And be that glue [that] allows us to stitch in different sorts of providers. We’re quite happy to do all the hard integration work,” he told Webster.