Bank-Fintech Partnerships, Outsourcing Arrangements and the Case for a Mentorship Regime

Bank-Fintech Partnerships, Outsourcing Arrangements and the Case for a Mentorship Regime

Luca Enriques, Wolf-Georg Ringe

Series number :

Serial Number: 
527/2020

Date posted :

June 18 2020

Last revised :

August 06 2020
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Keywords

  • Fintech • 
  • banking licence • 
  • Outsourcing • 
  • Regulatory Sandbox

Fintech firms, once seen as ‘disruptors’ of the traditional banking world, are now increasingly seen as attractive partners for established financial institutions.

Such partnership agreements come in different forms and contexts, but most share the goals of outsourcing key banking functions and facilitating market entry for new market players while overcoming relatively tough regulatory hurdles.

Yet such arrangements, while generally to be welcomed, pose a number of regulatory problems, in particular concerning the effective supervision of fintechs that operate outside of the direct purview of regulatory authorities. Questions of enforcement and effective supervision emerge, which may ultimately result in problems regarding market stability and systemic risk. Regulatory sandboxes represent one attempt to address these problems but may fail to do so and are often ineffective or unavailable. Other similar solutions, such as fintech charters and umbrella firms, may help but, similarly, provide an imperfect solution.

Against this backdrop, we make the case for a ‘mentorship regime’, which provides for a reliable regulatory framework for partnership agreements between fintech firms and established banks. This would allow for a de facto ‘private sandbox’ where experienced firms could mentor new startups and help them to cope with a complex regulatory process. At the same time, a state-backed mentorship plan would clear up the allocation of responsibilities, supervision competences, and liability questions and thus overcome problems of arbitrage and abuse. Ultimately, a mentorship regime may show the way to a new and more reliable future system of banking, making the well-established contractual practice of outsourcing banking services more reliable.

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This article has been accepted for publication in Capital Markets Law Journal ©: [2020] Published by Oxford University Press.

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