Regulators Urge Banks to Assess Risk in Fintech Relationships
Recently, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) issued new guidance for community banks to better assess risk as they increasingly consider partnerships with fintech companies to meet customers’ digital preferences.
“Innovation and evolving customer preferences are changing the financial services landscape, including the way financial products and services are delivered,” the guidance reads. “Some banks are exploring ways in which third-party relationships may assist them in responding to the changing landscape. These relationships are particularly relevant in situations in which community banks may benefit from additional expertise.”
“By providing access to new or innovative technologies, companies specializing in financial technologies (or “fintech”) can provide community banks with many benefits, such as enhanced products and services, increased efficiency, and reduced costs, all bolstering competitiveness,” the guide continues. “Like other third-party relationships, arrangements with fintech companies can also introduce risks. Assessing the benefits and risks posed by these relationships is key to a community bank’s due diligence process.”
American Banker noted that the regulators suggested that banks consider six main pillars of due diligence when assessing potential fintech relationships: business experience and qualifications; compliance with laws and regulations; financial condition; information security; operational resilience; and risk management and control processes.
The regulators also stated that the guide is to be used as a resource, not a mandatory set of rules. The FDIC said in a statement that the guidance is part of current efforts “to promote and support the adoption of new technologies by financial institutions, particularly community banks,” as they attempt to “offer enhanced products and services to their customers, increase efficiency, and reduce internal costs.”