Do Banks and Fintechs Need to Rethink Their Partnerships?

Source: American Banker

There's been a spotlight on fintech vetting in recent weeks, as regulators have signaled that they have begun scrutinizing bank-fintech partnerships. 

In a speech last week, the acting comptroller of the currency, Michael Hsu, described bank-fintech partnerships as a potential systemic risk because so much complexity is being brought into the financial ecosystem. 

"The growth of the fintech industry, of banking as a service, and of big tech forays into payments and lending is changing banking, and its risk profile, in profound ways," he said.

Several questions must be asked and answered about this, he said: Who is responsible for what when things break? How might confidence be lost in a banking services supply chain disruption and what would it take to regain it?  How do banks and their third parties view and treat customers in bank-fintech arrangements — when do customers go from being the client to becoming the product and how are consumer protections maintained? How vulnerable are banking services to stress at fintechs? What happens when fintechs fail? How are bank and fintech business models changing and how are incompatibilities reconciled?

The questions regulators are asking are things banks should already have been considering, evaluating, and managing throughout, Brian Graham, partner at Klaros Group, said in an interview. 

"It's been clear for decades that the regulators look at banks that are partnered with nonbanks and hold the bank accountable for what their vendors and partners are doing," he said. "That's not news. That puts the bank partner in effect into a role as the regulator of their fintech partners. So that bank needs to do everything it would do as if those fintechs were its employees, as if it were managing that business and the risk associated with it, as if the bank itself were directly responsible for it." 

What is new, he said, is that the regulators are increasingly focused on this area and increasingly enforcing those longstanding expectations.