As banks and credit unions look to streamline operations and improve customer experiences, partnerships between financial institutions and financial technology (fintech) companies continue to rise. Such collaboration can drive profitability and offer tremendous overall value, but it does come with risk.
That is why, as financial institutions begin to evaluate their technology budgets for 2024, concern about data security is taking a front seat, according to experts.
Risk management company Ncontracts [1] conducted a survey of 147 bank and credit union professionals in order to evaluate how financial institutions are navigating today’s risk and compliance challenges.
The research team learned that 72% of banks and credit unions prioritize compliance above all else when evaluating fintechs.
That is followed closely by Cybersecurity (62%), return-on-investment (46.3%), and reputation (44.4%).
“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 Office of the Comptroller of the Currency (OCC).
“If a fintech can’t demonstrate a strong compliance management program, no bank or credit union should want to touch it,” DeLeon said. “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?”
According to the authors of the poll, federal agencies are increasingly emphasizing the importance of third-party risk management. In June, they point out, The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the OCC released the Interagency Guidance on Third-Party Relationships: Risk Management [2], which promotes standardization for assessing third-party risk.
According to Ncontracts’ survey, more than 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, Ncontracts CEO Michael Berman explained, but that financial institutions are only considering fintechs that have mastered their own compliance and risk processes.
This poses a challenge for financial technology companies perceived as lacking in this area, he added.
“Financial institutions are looking more closely at risk when evaluating fintech partners—and for good reason,” Berman said. “Their exposure to risk is greater, not only opening them up to regulatory scrutiny, but also risking their reputation. Fintechs must prioritize risk and compliance if they expect to remain relevant and in business, and they must do so now.”
He said that more than half of the banks and credit unions his company surveyed plan to evaluate fintech partnerships in the next one to two years. “Therefore, this should be a top priority,” he concluded.
The full survey results are available on the Ncontracts website [3].