Strong compliance management is crucial for fintech-bank partnerships

72% of banks and credit unions are prioritizing compliance when evaluating fintechs, citing it as their top criteria in the due diligence process, according to Ncontracts.

fintechs compliance

As banks and credit unions evaluate fintech partnerships, cybersecurity (62%) is also a critical factor, followed by return on investment (46.3%) and reputation (44.4%).

Financial institutions look to streamline operations

Bank-fintech partnerships continue to rise as financial institutions look to streamline operations, improve customer experiences, drive profitability, and manage risk and compliance efforts. While these partnerships offer tremendous value, there is also risk. Third-party data breaches and cybersecurity continue to be a concern, and banks and credit unions are making note. This is especially critical as financial institutions begin to evaluate their technology budgets for 2024.

Additionally, federal agencies are increasingly emphasizing the importance of third-party risk management. In June, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released the Interagency Guidance on Third-Party Relationships: Risk Management. The guidance promotes standardization for assessing third-party risk and describes sound risk management principles when developing and implementing third-party risk management practices.

“You can’t underestimate the importance of a fintech partner’s compliance posture,” said Rafael DeLeon, Ncontracts’ SVP of Industry Engagement and a former bank examiner with the OCC. “If a fintech can’t demonstrate a strong compliance management program, no bank or credit union should want to touch it. The risk is too high for potential consumer harm, and operational issues could lead to even more compliance costs and regulatory trouble. Who needs it?”

Solid understanding of regulatory requirements among fintechs

For fintechs, this means that a strong compliance management program is key to securing partnerships with banks and credit unions. According to the survey, 80% of financial institutions report that the fintechs they have evaluated have a solid understanding of regulatory requirements, third-party vendor management, cybersecurity, and other key factors.

This doesn’t necessarily mean that most fintechs have demonstrated a sound understanding, but that financial institutions are only considering fintechs that have mastered their own compliance and risk processes. This poses a challenge for fintechs perceived as lacking in this area.

“Financial institutions are looking more closely at risk when evaluating fintech partners – and for good reason. Their exposure to risk is greater, not only opening them up to regulatory scrutiny but also risking their reputation,” said Michael Berman, CEO of Ncontracts. “Fintechs must prioritize risk and compliance if they expect to remain relevant and in business, and they must do so now. Over half of the banks and credit unions we surveyed plan to evaluate fintech partnerships in the next one to two years, therefore, this should be a top priority.”

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