A fundamental shift is happening as more Americans move towards digital financial services. Eight in ten consumers use a fintech product to manage their finances, and businesses benefit from access to a wide range of services to improve their financial operations.
Despite recent statements that missed the mark from Federal Deposit Insurance Corporation Chairman Marty Gruenberg, bank-fintech partnerships are a significant reason digital financial tools are so popular and widely available. That’s because fintechs are safe, sound, and regulated. More specifically, fintechs can partner with banks to provide best-in-class technology that helps consumers and small businesses alike.
In June, federal banking regulators unveiled long-awaited guidelines for banks looking to partner with third-party vendors such as fintechs. The guidance – developed by the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency – not only takes steps to provide clarity for banks that want to adopt leading technologies but also recognizes the benefits of these partnerships to drive responsible innovation and expand access to financial services.
To truly be successful, regulators should recognize that fintechs are indeed regulated and look to seasoned and responsible partnerships as a point of context, if not a playbook, to oversee and manage bank-fintech relationships. Such case studies can be captured in follow-on, more detailed guidance, as alluded to in the recent guidance release.
The Power of Partnerships: How Cooperation, Collaboration, and Integration Act as a Force Multiplier for Banks and Fintechs
Once viewed as a disruptive force in traditional banking, bank-fintech partnerships have become increasingly common and highly effective. Four out of five of the top 100 banks by asset size have partnered with at least one fintech company, according to McKinsey & Co., and fintech partnerships are the most common, and arguably the most effective, step banks are taking to digitize.
These partnerships unlock value for parties on each side of the equation. Banks provide fintechs with backend infrastructure, knowledge, compliance, and regulatory controls. Fintechs help banks access new markets, enhance and accelerate the rollout of digital offerings, and deliver a better, more customer-friendly overall experience. These partnerships help drive down the costs of financial services with improved efficiencies, better and faster decision-making with data analytics, and expanded access to banking and financial offerings. Incumbent financial institutions would not have eliminated or reduced overdraft fees without fintechs like Chime and other digital peers entering the marketplace.
On a practical level, fintechs partner with a chartered financial institution to offer banking services, such as an FDIC-insured savings account, small business loan, or payment service. Their bank partners then oversee these products and are subject to the third-party risk management guidance issued by the federal banking agencies. In these scenarios, the bank partner, as the lender or deposit holder, is ultimately responsible for ensuring that innovative products comply with applicable federal and state banking laws.
Building a Regulatory Blueprint: The Hallmarks Of Responsible Bank-Fintech Partnerships
Not all bank-fintech partnerships are the same, and those with robust controls and governance processes, strong oversight relationships, and a culture that prioritizes positive customer outcomes are best positioned for success. While not exhaustive, these are a few fundamental principles that underpin a successful, responsible bank-fintech partnership:
- A culture of compliance. Compliance and risk management are a crucial part of the overall partnership approach. Fintech leaders can create a culture that makes compliance a core tenet and ensure this mentality is evident in company investments and development work. For example, Coastal Community Bank works with Bluevine – a fintech dedicated to meeting the specific banking needs of U.S.-based small and medium-sized businesses – because of its compliance approach that aligns with regulatory standards and expectations and its shared mission of supporting underserved communities.
- An innovation mindset. Fintechs bring a customer-first mentality to banking. As a result, 93 percent of fintech users say it has helped save them time and money, feel more in control, and reduce fear and stress around finances. Banks should be open to customer-centric innovation, and fintechs should understand their partners’ compliance parameters. Strong partnerships leverage each other’s expertise to reach a common goal: delivering a great experience for the end user. Compliance and innovation are vital for success; a strong partnership doesn’t allow either side to operate in a silo.
- Commitment to transparency and accountability. Working with their bank partners, fintechs must follow applicable consumer financial protection laws and regulations, including anti-money laundering, credit reporting, debt collection, privacy, treatment, and electronic fund transfers. That means that a fintech partnering with a bank to offer loans, for example, must meet fair lending requirements under the Equal Credit Opportunity Act and face oversight by the Consumer Financial Protection Bureau.
Bank-fintech partnerships are an excellent example of harnessing technology to improve banking, resulting in faster, expanded access to services and capital. Regulators deserve credit for finalizing the third-party guidance and acknowledging the power of these partnerships. Looking ahead, we welcome regulators’ commitment to deliver more clarity on the expectations for community banking organizations in managing these risks. Banks and fintechs working together can provide even more benefits to consumers, small businesses, and the economy if the laws on the books – and the regulatory mindset – catch up to the digital reality.
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