Sponsor bank
Sponsor bank refers to a chartered bank that gives a non-bank payment or fintech company access to accounts, payment networks and deposit services. The bank also oversees the program's compliance.
United States: OCC, Federal Reserve and FDIC joint statement of 25 July 2024 (OCC Bulletin 2024-20). The FDIC custodial account proposal of September 2024 (FIL-64-2024) was not confirmed as final at the time of review.
How it works
Most fintechs are not members of card networks. A sponsor bank fills that gap. It holds deposits where relevant, connects the program to payment networks and settles transactions. The fintech usually runs onboarding, servicing and product design under the bank's oversight.
US regulators watch these arrangements closely. In July 2024 the OCC, Federal Reserve and FDIC issued a joint statement on banks offering deposit products through third parties. It flagged operational, compliance, liquidity and concentration risks. It also flagged the risk of misrepresenting deposit insurance coverage.
For a cross-border payment firm, the sponsor bank often holds the accounts that fund corridors. Losing the relationship can halt collections and payouts at once. Pitfalls include relying on a single sponsor and weak records of end-user balances. A 2024 FDIC proposal would require daily reconciliation of custodial accounts.
Example
Illustrative example: A US remittance firm keeps $30,000,000 of customer funds at one sponsor bank and $10,000,000 at a second. If the first bank exits, 75% of customer funds must move. A 50:50 split would cut that exposure to $20,000,000.
Frequently asked questions
Is the sponsor bank responsible for our compliance?
Both parties carry obligations. The bank stays accountable for its role and oversees the program. The fintech keeps its own duties, such as onboarding and servicing. The contract should set out who does what.
Why do sponsor banks ask for daily balance files?
Banks must know whose money sits in custodial accounts. A 2024 FDIC proposal would require records of each beneficial owner's balance and reconciliation at least daily. Accurate records also support pass-through deposit insurance.
Related terms
Sources
- What Is a Sponsor Bank and Why Do Fintechs Need One? · Pathward, N.A.
- Joint Statement on Banks' Arrangements With Third Parties to Deliver Bank Deposit Products and Services (OCC Bulletin 2024-20) · Office of the Comptroller of the Currency
- Requirements for Custodial Deposit Accounts with Transactional Features and Prompt Payment of Deposit Insurance to Depositors (FIL-64-2024) · Federal Deposit Insurance Corporation
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