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A fundamental shift is occurring as more Americans turn to digital financial services. Eight out of 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 After missing the mark from Federal Deposit Insurance Corporation Chairman Marty Gruenberg, bank-fintech partnerships are a key reason why digital financial tools are so popular and widely available. This is because fintechs are safe, solid and regulated. Specifically, fintechs can partner with banks to provide the best technology that helps consumers and small businesses.
In June, federal banking regulators revealed highly anticipated guidelines for banks seeking to partner with third-party providers such as fintechs. The guidance – developed by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – not only takes steps to provide clarity for banks looking to adopt advanced technologies, but also recognizes the benefits of these partnerships to conduct responsible operations. innovation and expand access to financial services.
To truly succeed, regulators must recognize that fintechs are indeed regulated and look to seasoned and responsible partnerships as a point of context, or even a guide, for overseeing and managing bank-fintech relationships. Such case studies can be incorporated into more detailed monitoring guidance, as outlined in the recent guidance publication.
The power of partnerships: how cooperation, collaboration and integration act as a force multiplier for banks and fintechs
Once considered a disruptive force in traditional banking, bank-fintech partnerships have become increasingly common and highly effective. Four out of five banks in the 100 largest by asset size have partnered with at least one fintech company, according to McKinsey & Co., and fintech partnerships are the most common, and arguably most effective, steps banks are taking to digitalize.
These partnerships generate value for parties on either side of the equation. Banks provide fintechs with backend infrastructure, knowledge, compliance and regulatory controls. Fintechs help banks access new markets, improve and accelerate the deployment of digital offerings and provide an overall better and friendlier experience for the customer. These partnerships help reduce the costs of financial services through improved efficiency, better and faster decision-making through data analytics, and expanded access to banking and financial offerings. Incumbent financial institutions would have neither eliminated nor reduced overdraft fees without fintechs like Chime and other digital peers entering the market.
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 partner banks then oversee these products and are subject to third-party risk management guidelines issued by federal banking agencies. In these scenarios, the banking partner, as lender or deposit holder, is ultimately responsible for ensuring that innovative products comply with applicable federal and state banking laws.
Building a regulatory model: the characteristics of responsible partnerships between banks and financial technologies
Not all bank-fintech partnerships are the same, and those with strong governance controls and processes, strong oversight relationships, and a culture that prioritizes positive customer outcomes are best positioned for success . Without being exhaustive, here are some fundamental principles that underpin a successful and responsible bank-fintech partnership:
- A culture of compliance. Compliance and risk management are a crucial part of the partnership’s overall approach. Fintech leaders can create a culture that makes compliance a core principle and ensure that this mentality is evident in the company’s investments and development work. For example, Coastal Community Bank walk with Blue Vine – a fintech dedicated to serving the specific banking needs of small and medium-sized businesses based in the United States – due to its compliance approach that aligns with regulatory standards and expectations and its shared mission of supporting underserved communities.
- A spirit of innovation. Fintechs are bringing a customer-centric mentality to the banking industry. Therefore, 93 percent of fintech users say it helped them save time and money, feel more in control, and reduce fear and stress related to finances. Banks must be open to customer-centric innovation, and fintechs must understand the compliance parameters of their partners. Strong partnerships leverage each other’s expertise to achieve a common goal: delivering an exceptional end-user experience. Compliance and innovation are essential to success; a strong partnership does not allow any party to operate in isolation.
- Commitment to transparency and accountability. In collaboration with their banking partners, fintechs must comply with applicable consumer financial protection laws and regulations, including anti-money laundering, credit assessment, debt collection, confidentiality, processing and electronic funds transfers. This means that a fintech that partners with a bank to offer loans, for example, must meet fair lending requirements under the Equal Credit Opportunity Act and be subject to oversight by the Consumer Financial Protection Bureau.
Bank-fintech partnerships are a great example of leveraging technology to improve banking, resulting in faster and broader access to services and capital. Regulators are to be commended for finalizing third-party guidance and recognizing the power of these partnerships. For the future, we welcome the regulators’ proposals commitment provide greater clarity on the expectations of community banking organizations in managing these risks. Collaboration between banks and fintechs can deliver even greater benefits to consumers, small businesses and the economy if existing laws – and regulatory mindset – catch up with the digital reality.