National and global fintech companies are becoming household names. We all likely have at least one application downloaded that is categorized as a fintech—even more so now due to the pandemic’s creation of reliance on technology to continue to foster relationships and financial savviness at more than an arm’s length away. Financial technology, more commonly known as fintech, was introduced in the 21st century and was initially referred to as the back-end systems of established financial institutions. This category of company has grown into more consumer-related services, which include industries such as retail banking, nonprofit, real estate, trading, education, and more. This category has transformed the financial landscape.
Of course, all new, innovative, and exciting transformations that occur in the financial world also open the door to fraud, cybersecurity risks, and financial losses, pushing these companies toward the high end of the regulatory risk spectrum. While bank partnerships with fintech companies can be a smart financial decision and expansion of services, they are not an easy task to master.
These concerns have not gone unnoticed. The Federal Reserve has closely monitored these companies transforming the financial services industry, noticed the potential for regulatory risk, and listened to the concerns of stakeholders. In December 2020, at a first-ever ICBA ThinkTECH Policy Summit, Federal Reserve Governor Michelle Bowman told bankers the “Federal Reserve plans to publish a white paper early next year on community bank partnerships with fintech companies and effective practices for managing those arrangements.” Bowman went on to say these partnerships can promote a “diversity of choice and accessibility” for customers, improve efficiency and regulatory compliance, and more. In addition to this announcement, Bowman said the agency will launch a pilot program next month to help roll out the FedNow instant payments service as soon as possible. The ICBA has urged the Federal Reserve to collaborate with community banks to swiftly implement FedNow. In addition to these encouraging changes, it was stated at the summit that “Congress is charged with staying ahead of fintechs seeking bank-like powers without regulatory oversight.”
These announcements help solidify that fintech companies are not going anywhere and their presence in the financial world will continue to grow and gain financial strength. While not all financial institutions are ready to begin a partnership with a nontraditional company, it is a great step forward knowing that if and when they do, there will be guidance and support from the regulators to provide a more clear and concise path than what we have had in past years.
If your bank has partnered with a fintech or similar nonbank company to enhance or add to the financial services you offer, one key risk mitigant is compliance training. BKD CPAs & Advisors has developed a site to support banks with training laser-focused on compliance risks related to third-party relationships. Visit bkd.com/theconservatory for more information.