Finding the right sponsor bank for your lending program - Canopy
Finding the right sponsor bank for your lending program
Starting a B2B Lending Program
Sponsor banks enable non-bank lenders to offer loans and create innovative products that serve their industry. See the top sponsor banks and learn how to choose the right partner.
Tom Sullivan
Is a fintech writer featured in Forbes, Fortune, and Inc. Passionate about the freedom created by the union between finance and tech.
Fintech enables many non-bank entities to become lenders, whether fintech startups or SaaS companies that add lending to their product suite. However, any lender not a chartered bank cannot operate without a vital partner— a sponsor bank.
If you’re a lender, choosing the right one is crucial for many reasons. Sponsor banks affect the types of services you can provide, ensure compliance with many regulatory requirements, and enable you to offer innovative lending solutions without your own banking license.
Here, we’ll break down what a sponsor bank should provide, how to pick a good sponsor bank for your lending operation, and some of the top sponsor banks that Canopy’s lending customers use today.
What is a sponsor bank?
Because most lenders—especially non-bank lenders—don’t have a banking charter, they must partner with a sponsor bank that does. As an intermediary between the lender and the banking infrastructure, the sponsor bank enables the lender to perform banking functions that it would otherwise be cut off from.
Key functions of sponsor banks in lending include:
- Participation in the banking infrastructure: This access includes moving money, issuing cards on networks like Visa and Mastercard, and participating in interbank payment rails like the Automated Clearing House (ACH) and Real Time Payments (RTP).
- Loan origination: To secure the capital to give out the loan, the lender needs either a sponsor bank or to be licensed. A large enterprise with a charter may have a license to self-fund, but most fintech and non-bank lenders need a sponsor bank to fund loans.
- Regulatory compliance: Sponsors must ensure their lenders have a strong compliance program. Because of that, they will help lenders set up programs that reduce risk and ensure compliance, such as suspicious activity reporting, transaction monitoring, and Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance.
- Enabling lending services: With their banking infrastructure, sponsor banks enable non-banks to offer banking as a Service (BaaS), which includes lending programs. Without a sponsor, there is no framework or infrastructure where a non-bank company can provide loans.
Sponsor banks don’t just check a compliance box. They’re essential partners that can help non-bank lenders create innovative new lending products to serve their niche industry. Lenders can grow their programs with seamless operations and minimal headaches with the right sponsor bank and infrastructure.
Choosing the right sponsor bank for your lending needs
Choosing the right sponsor bank is critical to setting up a new lending program for long-term success. Just because a bank has high trust doesn’t mean they have the technical expertise to help you build innovative lending products.
You will want to consider all of these factors:
- Reputation and trust: Going with a well-established bank with a good reputation can be helpful, as you’ll work with a partner who knows what they’re doing. However, if you partner with a larger financial institution, they may not provide the same attention and care as a smaller institution specializing in your needs. Also, just because a bank has a good reputation doesn’t mean they serve your industry or have the technical compatibility you need.
- Technology integration: Fintech has raised the bar for lenders, as businesses and consumers now expect flexible, fast access to capital and the ability to use new types of assets for collateral. To help you build competitive lending products, banking partners should have reliable and robust APIs that provide access to real-time data. They should also be compatible with fintech platforms that enable streamlined loan applications, underwriting, and servicing.
- Compliance expertise: Lending is full of compliance requirements, and having a sponsor bank with expertise in these areas is a huge benefit to non-bank lenders. Check whether a sponsor bank is familiar with the lending requirements in your particular industry.
- Niche specialization and experience: Find a sponsor bank that specializes in your industry and has a successful track record of customers like you. For fintechs and non-bank lenders, this is especially important because some banks may not even be able to support your use case or industry, while others will be experts.
- Track record of innovation: Innovation and speed are essential in modern lending. Fintech lenders are now funding loans on the same day, using flexible collateral types like cryptocurrency and art, and providing fast access to working capital to businesses. Look for a sponsor bank that’s helping non-bank lenders create innovative products.
- Appropriate risk appetite: Some banks may want to avoid certain loan types and industries due to regulatory compliance burdens or perceived risks. In an industry like cryptocurrency or gaming, you’ll need a sponsor bank with a higher risk appetite. Even if you’re looking to do small business loans, you may need a bit higher risk appetite than a traditional bank is willing to offer.
5 top sponsor banks for commercial lenders
At Canopy, we constantly speak with non-bank lenders looking to create new loan products. In most cases, one of their first steps is securing a sponsor bank. Here are a few familiar sponsor banking partners that commercial and SMB lenders choose to work with.
TAB Bank
TAB frequently partners with fintechs and lenders in the consumer and commercial sectors and is well-known for enabling innovative loan products.
Focus: Asset-based lending, factoring, equipment financing, working capital
Specialization: SMBs with strong expertise in the logistics and transportation sectors
Technology Partnerships: TAB embraces digital transformation, collaborating with fintechs to deliver modern banking services
Live Oak Bank
Live Oak Bank helps businesses create personalized lending products for their industries and claims to enable flexible financing options with rapid decision-making.
- Focus: Niche lending industries such as agriculture, healthcare, and commercial real estate
- Specialization: SBA loans, USDA loans, and specialized commercial financing
- Innovative Edge: Live Oak Bank uses technology to simplify loan applications and servicing
WebBank
With its strategic partner program, WebBank helps partners create innovative financial products and offers a wide range of banking services.
Focus: Partners with fintech companies to support commercial and consumer lending programs
Specialization: Credit card programs, point-of-sale financing, revolving lines of credit, auto-financing, and asset-backed loans
Notable Clients: Works with leading fintechs and is a well-known player in embedded finance
Cross River Bank
A well-known partner in the fintech industry, Cross River Bank’s lending program offers a full-stack digital lending solution.
Focus: Provides banking and lending infrastructure to fintechs and SaaS providers for consumer and commercial loans
Specialization: Origination and funding, capital markets, and compliance oversight
Technological edge: Cross River has a good reputation in the tech industry for its advanced API-driven banking core and banking expertise
Celtic Bank
Celtic Bank is an expert strategic partner to lenders, helping companies launch new financial products while overcoming many risks and requirements.
Focus: Supports small business lending and consumer financing through partnerships with fintechs and other lenders
Specialization: Lines of credit, working capital loans, term loans, credit cards, equipment financing, and more
Flexibility advantage: With expertise and proven strategies, Celtic Bank can help build custom lending products to match industry and regulatory requirements
Tech-forward sponsor banks are key
A recurring theme among our customers is the need for tech-forward sponsor banks to enable them to create innovative lending solutions that stand out. With the rise of open banking and API-connected technologies, there’s no reason to partner with a bank that still relies on manual or paper-based processes.
While fintech competitors are underwriting loans in hours and funding them the same day, tech-laggard banks could still take weeks to approve a loan. While compliance expertise and reputation are still important, don’t settle for a bank that’s behind the times.
Build innovative loan products with any sponsor bank
As the most flexible loan management system for business lenders, Canopy can help you launch, operate, and scale a wide variety of loan products, regardless of your sponsor bank. We can also help you secure a sponsor bank that’s well-suited for both your industry and loan type.
If you’re interested in discussing the first steps of building an innovative lending program or expanding your existing program with new types of loans, contact Canopy today.