Kenneth E. Kohler, Jeremy R. Mandell, Maria B. Earley and Henry M. Fields*
The authors of this article explain a guide released by federal banking agencies titled, "Conducting Due Diligence on Financial Technology Companies—A Guide for Community Banks," which they believe is a readable and practical roadmap to the issues the regulators will expect to be addressed in future relationships.
The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the "Agencies") jointly released a guide titled "Conducting Due Diligence on Financial Technology Companies—A Guide for Community Banks"1 (the "Guide"), which is intended to help community banks assess risks when considering relationships with fintech companies. Although the Guide is not binding in its own right, it draws upon existing regulatory requirements and supervisory guidance—and, according to the Agencies, is consistent with proposed interagency guidance2—and should be viewed by community banks both as a useful source of due diligence best practices and as a preview of potential areas of focus in future regulatory examinations.
BANKS AND FINTECHS
Fintech companies desiring to provide services to, or to partner with, community banks may find the Guide to be an important roadmap to the information and assurances community banks will expect to receive from fintech companies in discussions regarding future relationships. While the Guide is specifically addressed to "community banks"—defined as banks with $10 billion or less in consolidated assets supervised by one of the Agencies—the Agencies note that the fundamental concepts of the Guide may be useful for banks of varying sizes and for other types of third-party relationships.
Benefits to Banks
In recent years it has become widely recognized that banks can benefit meaningfully by outsourcing to, or partnering with, fintech companies in any number of operational areas and product types, including:
- Digital and mobile payments and deposits;
- Customer interface and experience technology:
- Provision of money management and wealth management tools to customers:
- Expedited credit underwriting and loan origination processes; and
- Data breach and identity protection tools, among many others.
While banks of all sizes can benefit from fintech relationships, such relationships can particularly help community banks level the competitive playing field with larger regional and money-center banks, which have substantially greater in-house resources to devote to the rapidly evolving technological demands of the financial services industry
Benefits to Fintechs
Fintech companies, in turn, can benefit greatly from the substantial pre-existing customer bases, market presence and reputation of banks of all sizes. However, the founders and managers of fintech companies often come from entrepreneurial and technical backgrounds and are not necessarily well versed in the pervasive and intensive risk management and supervisory environment in which banks have long operated. It is therefore critical to the long-term success of any bank-fintech relationship that thorough due diligence be conducted at the outset of the relationship to identify and resolve regulatory and risk management issues prior to entering into formal contractual arrangements.
THE GUIDE
In the Guide, the Agencies recognize the value to banks of fintech companies providing access to new or innovative technologies that can provide banks with enhanced products and services, increased efficiency, and reduced costs, while bolstering competitiveness. Not surprisingly, the Agencies also recognize that, as with all third-party relationships, bank relationships with fintech companies also introduce risks that should be assessed through the bank's due diligence process.
Footnotes
* Kenneth E. Kohler (kkohler@mofo.com) is senior of counsel in Morrison & Foerster LLP's Los Angeles office and a member of the firm's Capital Markets Group. Jeremy R. Mandell (jmandell@mofo.com) is a partner at the firm and co-chair of its Financial Services Practice Group and co-lead of the FinTech practice in Washington, D.C. Maria B. Earley (mearley@mofo.com) is a financial services regulatory and enforcement partner in the firm's Washington D.C. office. Henry M. Fields (hfields@mofo.com) is senior counsel in the firm's Los Angeles office representing domestic and international financial institutions for more than 40 years.
2 On July 19, 2021, the Agencies jointly published for comment proposed interagency guidance for third-party relationships. See "Proposed Interagency Guidance on Third-Party Relationships: Risk Management," 86 Fed. Reg. 38,182 (July 19, 2021), https://www.federalregister. gov/documents/2021/07/19/2021-15308/proposed-interagency-guidance-on-third-party-relationshipsrisk-management. The Agencies state that the Guide is also consistent with this proposed interagency guidance.
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Originally Published by The Banking Law Journal
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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