The skyrocketing expansion of fintechs delivering inventive products and services is impressive, and it’s only natural that traditional banks want to seize a bit of that action. After all, many of these startups have identified a specific consumer pain point – often something that has long troubled a bank – and applied cutting-edge technology to solve it. Along the way, fintechs are carving out an entirely new market while also expanding their reach to previously unbanked or underbanked consumers.
Remember, the traditional banking industry was built differently from startups, leading to potential culture clashes when organizations of different origins come together. Fintechs are known for innovation and a faster pace of change because they often encounter less of the red tape that governs bank operations. Conflicts can arise as banks turn to fintech opportunities, so they need to consider the risk management frameworks they need to have in place as those partnerships launch and evolve. Don’t underestimate the change management hurdles that need to be tackled as well.
The banking industry, as we all know, remains heavily regulated – with the promise of more consumer protection regulation on the way, but fintechs still operate outside much of that oversight. Be sure to go in with your eyes open, as any risk and compliance teams in place at a fintech are likely not as mature and will require extra time to train, nurture and oversee. You’ll need strong controls to mitigate the risks posed by these complex relationships.
In the coming months, Spinnaker will share additional insights on issues and opportunities in bank-fintech partnerships. Through our blog, we’ll explore open banking and lessons banks can learn from the simplicity of fintechs, recommend updates to a bank’s governance structure to account for the unique risks of fintech partnerships, and delve into what fintechs should be considering as regulatory overnight draws nearer.
To start, we’re looking at the basic risk management tactics banks must leverage in their due diligence as they consider one of three main types of fintech partnerships.
Beyond the fundamental vendor vetting, each third-party relationship presents slightly different concerns for a bank. Investing the appropriate time and attention up front – that all-important due diligence – is essential before partnering with any fintech. Make sure your assessment also includes looking in the mirror to see if you truly can handle this relationship and the added responsibilities of IT system support and resource capacity across all three of your lines of defense.
Here are a few things to consider before you move forward:
Even if regulatory oversight is still looming and fintechs present a new type of competition, banks are recognizing that fintechs are here to stay, especially as they gain market share. Indeed, nearly half of American financial services companies plan to lean on fintech partnerships for growth, further underscoring that these startups are positioned for deals that leapfrog them long past that infant stage. While it’s certainly one strategy for elevating your bank, you’ll need to confirm that achieving that goal must be countered with understanding the risk you might be taking on in the process.
The most critical decision should come long before you sign onto any fintech relationship. Engage your risk and compliance team members, who have the knowledge and expertise on what your regulators are going to expect. We’re already seeing larger banks exploring the value of creating specialized teams focused on the unique risk and compliance considerations of fintech relationships.
Save your organization time, energy and money by gaining their insight on the best way to approach and structure a fintech relationship and apply your existing risk management practices. The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency recently co-published a guide for community bankers to follow in assessing fintechs, with steps that any banking leader should embrace. And our Spinnaker consultants are here to help you understand the risks involved in any fintech relationship – along with how to navigate them so you can gain optimal return with minimal impact on your core business.
Spinnaker consultant Laurent Robert contributed to this blog post.
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