Financial technology, or fintech, companies are revolutionizing the services offered by financial institutions. Traditional banks and financial institutions are turning to fintech solutions more rapidly than ever before to give the customers quick and convenient access to an array of banking services like automated online payments, fund transfers, personal loans, investments and much more. Although a partnership between fintech companies and a bank or other financial institutions create a more convenient experience for customers but there are many variables and risks for both partners which have to be considered and analyzed before joining forces.
Two major risk areas for both the banks and fintech companies are:
- Regulatory Risk – An immediate more pressing concern for any traditional bank would be to understand the regulatory risk they would be exposed to by introducing the new piece of technology from a fintech company. Banking regulations take years to be modified and get approved through various channels, hence the regulatory compliance department has to eb extra vigilant in making sure the banks still comply with the traditional regulations after joining forces with new fintech solutions.
Though fintech companies aren’t currently subject to federal examinations, it doesn’t mean they won’t be in the future. The Office of the Comptroller of the Currency (OCC) has already proposed a special-purpose national bank charter specifically for fintech companies. Many state attorney generals have expressed concern or interest in providing regulatory “sandboxes” for fintech companies where future regulations might be developed.
- Reputation Risk – With every piece of new technology there comes a risk of scale. Any new technology introduced goes through many phases before it reaches a steady state in its lifecycle. Banks and Financial institutions invest significant amount of time and resources to integrate a new fintech solution into their age-old product which could be ruined by one misstep or false promise. For the fintech over expectation at a very early stage could kill a rather good product before it actually shows results.
It is very important for both the traditional institutions and the fintech companies to manage expectation, curate a perfect messaging to the customer base and spend time and resources in educating internal staff.
Apart from understanding risk, it is very critical that banks build a strong compliance foundation at the start of a fintech partnership and be prepared for an increased scrutiny from regulators.
Few steps which banks and financial institutions must take –
Asking the right questions and understanding the fintech’s risk management program –
All fintech companies are extremely vigilant and may already have a risk management program in place that addresses risk posted by Anti-Terrorist Financing (ATF) regulation, General Data Protection Regulation (GDPR) and other international regulations. However, it’s likely that financial regulatory compliance requirements haven’t been incorporated into the fintech company’s risk management program. Banks must ask in detail about their current compliance program and personnel in place, training programs and audit programs. All regulators need to see a robust audit and training of personnel in place and hence it’s critical that they align with the bank’s in-house compliance program.
Building a robust risk management program including the banking compliance –
If the fintech companies lack a robust laid out compliance plan, it is extremely important for the banks to build a completely new compliance plan before partnering with the company. All the stake holders of the fintech company have to understand their role and be specifically trained and assessed with the banking compliance regulations. Taking help of industry experts in risk management and compliance they have to collaborate in designing and implementing strong internal controls for the fintech. Proper training and learning resources for the fintech personnel helps build a culture of compliance which is extremely important for a long-term partnership.
What should the fintech companies do?
Lay the foundation for existing and future regulations –
It is essential for fintech companies to engage with industry experts and specialists to understand the regulatory implications their customers might be exposed to in the immediate and near future. Fintech companies should strengthen their regulatory compliance program not only for the current product but for all kinds of product extensions and new products in future. It is essential for fintech personnel to build a culture around training and keeping updated with the upcoming regulations. Investing time and resources in laying this foundation for a proactive risk management program would help save huge costs of rebuilding compliance programs and avoid millions of dollars of fines in future.
Prepare for regulatory requirements –
Banks and financial institutions are one of the most regulated in the world. With more and more regulations being introduced and new regulators instituted its matter of time when fintech companies will have to deal with their own set of regulators. It is very essential at this point that fintech companies anticipate how regulators might impact their partnership with customers. Preparation for a regulatory agency would need help from trainers and auditors to set up a system of internal audit and personnel assessment at periodic intervals.
Technology will always outpace regulation; this should not be a reason to slow down innovation and deprive customers of taking advantage of the latest technology. Regulatory risk that result from new fintech and bank partnerships can be addressed by leveraging the expertise of industry experts and consultants on a regular need basis. Financial institutions and fintech companies alike can go beyond simply addressing regulatory compliance risk for new joint ventures, they can also add value to their own organizations by adding or strengthening internal controls related to risk management.