- Bank regulators highlighted a number of areas Friday where community banks should conduct due diligence when partnering with fintech firms to properly assess a fintech’s risks and qualifications.
- The 20-page guide, released by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve, focuses on six topics banks should evaluate in a potential fintech partner: business experience and qualifications; financial condition; legal and regulatory compliance; risk management and controls; information security; and operational resilience.
- "This guide is intended to be a resource for community banks when performing due diligence on prospective relationships with fintech companies," it said. Use of the guide is voluntary, and does not anticipate all types of third-party relationships and risks.
The guide acknowledges the growing number of community banks using third-party fintechs to supplement and enhance their services, and says the pairings can lead to increased efficiency and reduced costs, "all bolstering competitiveness."
The partnerships, however — which many community banks have adopted to offer products that compete with larger national lenders — are not without their risks, the guide said.
"Assessing the benefits and risks posed by these relationships is key to a community bank’s due diligence process," the agencies noted in the guide.
Many fintechs have been stepping up to supplement and enhance banks' payment systems, with venture capitalists backing those so-called banking-as-a-service startups. In those situations, fintechs partner with banks and make use of their banking license to provide new services that generate revenue they can split with the banks.
When considering a fintech’s operational and financial history, banks should review a potential partner’s public records and media coverage.
A fintech company’s directors and executive leadership should also be scrutinized, as well as whether or not the firm has sufficient management and staff with appropriate expertise to handle tasks, the guide said.
"A fintech company, its directors or its management may have varying levels of expertise conducting activities similar to what a community bank is seeking," the guide said. "Understanding a fintech company’s qualifications and strategic direction will help a community bank assess the fintech company’s ability to meet the community bank’s expectations and support a community bank’s objectives."
Community banks should be diving into a fintech’s financial statements and annual reports to evaluate its financial condition prior to a partnership, the regulators said in the guide.
"Some fintech companies, such as those in an early or expansion stage, have yet to achieve profitability or may not possess financial stability comparable to more established companies," the guide said. "Some newer fintech companies may also be unable to provide several years of financial reporting, which may impact a community bank’s ability to apply its traditional financial analysis processes."
Banks should also consider incorporating legal and regulatory compliance terms into the partnership contract, such as authorization for the bank and its primary supervisory agency to access the fintech company’s records, the guide said.
A partnership contract can also include authorization for a community bank to monitor and periodically review or audit the fintech for compliance with the terms, the guide said.