– BHG Financial Institution Network

Collaborations between financial services technology firms (fintechs) and financial institutions are occurring more frequently than ever. Many financial companies see fintechs as an affordable, nimble solution to their technology gaps. Others partner with fintechs for assistance with compliance and regulatory governance. The fastest-growing fintech segment enables financial institutions to diversify their customer bases, expand revenue, and even increase deposits via banking-as-a-service agreements.

It is easy to recognize the contribution a fintech can make to your organization. However, it is more challenging to find the right fintech partner for your business. Ideas for how to do that is the goal of this article. We will discuss what steps you should take before entering a fintech relationship, efficient ways to conduct due diligence, and ensuring the compatibility of your fintech partnership before and during the relationship.

What to know before committing

Can the fintech you are considering produce consistent value over time? Can you demonstrate that the relationship is being appropriately managed amid increased regulatory scrutiny of third-party risk management? These are just a few of the things you will need to know before a partnership can begin.

Ultimately, choosing the right fintech will come down to the quality of your institution’s due diligence. Done well, due diligence can save your business time, money, and resources. It can also help focus your analysis by ensuring a potential partner can meet such criteria as:

• Financially and operationally capable of providing the desired services
• Adds organizational value while maintaining proper controls
• Enhances your organization’s brand and reputation

The due diligence journey

The discovery process starts with internal decision-makers and how they respond to the foundational questions, which are designed to help shed light on the pros and cons of a potential partnership:

1. What benefit(s) will we achieve by partnering with the third-party fintech?
2. What are the estimated savings and/or revenues we can expect over 1-5 years?
3. How much will it cost to establish and maintain the partnership over 1-5 years?
4. What kind of risk management program does the fintech partner possess?
5. Can our infrastructure and staffing handle the activity generated by the partnership?
6. Is the fintech’s risk culture and business approach compatible with ours?
7. Does the fintech have a good business reputation, based on online research and discussions with current business partners?

A company can deepen the effectiveness of due diligence by tapping into or creating additional resources. For example, your company’s existing third-party risk management team should help evaluate a potential fintech partner. A cross-disciplinary team could be assigned to other essential tasks, such as identifying critical risks and creating a partnership implementation plan.

Even federal banking agencies can be a due diligence resource. In 2021, Conducting Due Diligence of Financial Technology Companies: A Guide for Community Banks was published. Despite being targeted at smaller banks, the content generally applies to any business considering a strategic fintech partnership. The content put forward these six key topics to consider during a due diligence evaluation

1. Business Experience & Qualifications Company overview List of client references Ownership information

2. Financial Condition Financial statements & auditor’s opinion Annual reports Market information on competitors

3. Legal and Regulatory Compliance Organizational documents & business licenses Outgoing legal & regulatory issues

4. Risk Management & Controls Policies, procedures, other documentation Self-assessments Key risk indicator reports

5. Information Security Information security control assessments Incident management & response policies Incident reports

6. Operational Resilience Business continuity, disaster recovery, incident response plans Service-level agreements Outsourcing policies

Trust but verify

Although a fintech partner may perform duties or provide services on an institution’s behalf, it is the institution’s responsibility to properly oversee that relationship. That is a fundamental tenet of third-party risk management. Partnering with a fintech could raise or lower your company’s existing risk profile due to changes in credit, market, liquidity, reputational, operational, regulatory, and compliance risks. Proper due diligence of a fintech partner considers how the relationship could alter your risk profile. Your organization should trust but verify the information provided to you. Critical areas to analyze and confirm: established business relationships, financial performance, compliance program performance, reputation and litigation research, risk controls, and technologies used.

One crucial aspect of due diligence that should not be overlooked is the need for ongoing analysis once a fintech is integrated into your organization. No matter what service the fintech provides, your institution is responsible for confirming that the fintech meets its contractual and service-level responsibilities throughout the life of the relationship. Failure to identify and address inherent and developing third-party vendor risks could reduce a company’s revenue stream, cost the organization valuable time and resources, jeopardize the safety of customers’ personal identifiable information (PII), damage the organization’s public reputation, and increase regulatory scrutiny.

Concluding thoughts

The recent failure of several high-profile fintech partnerships suggests a lack of effective due diligence at some juncture in their relationships. The guidelines and information presented here are designed to help your institution avoid the same fate. Common sense dictates that any type of new business relationship, fintech or otherwise, should be fully vetted and understood before it begins. The due diligence journey is endless, but you do not have to go it alone. Turn to those who are ready to help you along the way.