The fintech industry relies on the traditional banking infrastructure
User experience is an important part of anything we consume, but it can also serve as an illusion sometimes. A lot of brands and businesses engage in white-labeling, where they rely on another provider's infrastructure to build out their product while labeling it as their own, to build out their user base.
We see this in every industry. Most supermarket store brand products are provided by companies that sell to multiple supermarkets, changing only the labels. Retailers and drop shippers buy clothes from the same overseas manufacturer just to slap a different logo on them. It’s a seemingly innocent practice, but it’s something worth being aware of because it can involve our money too.
How this manifests in fintech
Earlier this year, Robinhood rolled out a banking service integrated into their mobile investment app and even gave those who signed up a debit card to access the funds. Many users might understandably think it’s really cool that Robinhood is now a bank too, but no, they’re not.
That app feature actually relies on FDIC-insured, Sutton Bank, to hold your cash, and they also depend on JPMorgan Chase to handle all of your ACH transfers. These are called partner banks, and what Robinhood is doing is called “sweeping” the funds to them. And this is just one example of how this practice is proliferating through the industry.
Online banking services are a dime a dozen nowadays, and most of them rely on similar practices and partnerships with other banks to do business. (Hint: look up Bancorp Bank, which partners with big names like Chime, SoFi and more.)
How do they make money? The vast majority of them do so via interchange fees that merchants pay to banking service providers when customers use their debit or credit cards. And beware, some also make a hefty buck charging out-of-network ATM fees.
What does this mean for us as end-users? For now, not much. Simply understanding where your money really lies is just another way of being prudent.