Fintech is Not As Scary As You Think

For banks unsure about taking the leap into fintech

For a lot of community and mid-size banks, “fintech” still sounds like a category of risk rather than a category of opportunity. The headlines don't help, such as enforcement actions against banking-as-a-service programs, consent orders tied to weak third-party oversight, regulators publicly warning about the pace of bank-fintech partnerships outstripping controls. It's easy to conclude that the safest move is no move at all.

But sitting out isn't actually the safe option anymore. Deposit competition, younger customer expectations, and non-bank players chipping away at fee income are all pushing banks toward some form of fintech partnership, whether they're ready or not. The real question isn't should we get into fintech; it's how do we do it without becoming the next cautionary tale?

What decision makers fear the most

When we talk to bank leadership considering a fintech partnership, the fears tend to fall into three buckets:

• "We'll get hit with an enforcement action for something we didn't do." The fear of inheriting a fintech's compliance failures and being unable to demonstrate the bank exercised proper oversight.

• "We don't have the internal expertise to know what good looks like." Many banks have never operated a program at fintech scale and don't know what questions to even ask.

• "Once we're in, we can't get out." Concern that unwinding a fintech relationship - especially one with real deposit volume - becomes operationally and reputationally painful if the partnership sours.

How fears can be alleviated

• The enforcement fear can be addressed with clear and enforceable Master Service Agreement (MSA) terms, defining expectations with fintech partners, setting documentation standards and an adequate control framework with effective proactive oversight (i.e., policy & procedures, risk assessments, QA testing, SLAs). Regulators generally aren't looking for perfection. They're looking for evidence the bank has proper oversight controls and can prove it. For example, an independent review of the fintech's BSA/AML/OFAC controls, done proactively rather than in response to an exam finding, is the clearest way to demonstrate that. Again, a strong, direct relationship with your regulators is just as important as the relationship you're building with your fintech partner, and it's the one that pays off when something does go wrong.

• The expertise fear is addressed by borrowing expertise rather than trying to build it overnight. Bringing in outside compliance specialists for the initial program design and periodic validation lets the bank get up to speed without betting the program on an internal learning curve.

• The exit fear is addressed at the contract stage, not after the fact. Wind-down provisions, data requirements, and customer notification protocols should be negotiated before the partnership launches, when both sides still have leverage to agree on fair terms.

Advantages of adopting fintech

• New deposit and fee revenue without building the technology or acquisition engine in-house.

• Access to customer segments traditional branch banking struggles to reach organically.

• Faster product innovation than an internal IT Roadmap could ship alone.

• Diversification into non-interest income that's less rate-sensitive

Done well, these partnerships let a bank punch above its weight without punching above its risk tolerance.

What are the risks

The risks are real, but they're also well understood at this point. The most common ones:

• Third-party risk management gaps. The bank is ultimately accountable for what its fintech partner does, even when the fintech is the one touching the customer. Weak due diligence at onboarding, and weaker ongoing monitoring after, is one of the biggest driver of enforcement actions in this space.

• BSA/AML/OFAC and compliance risk exposure. Fintechs often move fast and build products first, risk and compliance second. If the bank doesn't have visibility into the fintech's KYC, transaction monitoring, sanctions screening and consumer compliance controls, it inherits blind spots it didn't create.

• Program complexity outpacing internal capacity. A bank sized for its own deposit base suddenly has to manage program volumes at fintech scale (think more accounts, more transactions) often without adding headcount or resources to meet the demand. This is where the classic bank org chart starts to strain: the same Chief Compliance Officer or BSA/AML Officer who oversees traditional bank customers is now also expected to oversee a fintech partner's entire customer base, on top of their existing workload. The bandwidth gets thin, the expectations get high, and something eventually slips through.

• Reputational risk. When something goes wrong in a fintech partnership, it's the bank's name that ends up in the consent order, not necessarily the fintech's.

Some ways banks mitigate related risks

Closing the gap requires the right structure, and it doesn’t take much to get there:

• Build a real third-party risk management framework specific to fintech partnerships, not a repurposed vendor-management checklist designed for something like your core vendors. A number of specialized fintech providers now exist specifically to support sponsor-bank oversight functions. Work with the people who already know what they’re doing.

• Establish ongoing monitoring, not annual reviews. Transaction volumes, due diligence, and performance should be reviewed on a cadence that matches the pace of the program, not the pace of the bank's audit calendar. That means real, ongoing dialogue between the bank and the fintech partner to agree on who is monitoring what, how often, and what gets escalated. This requires more energy than a once-a-year checkin.

• Get independent validation of the fintech's BSA/AML/OFAC program, consumer compliance and operational controls before problems show up in an exam. This is something that regulators really impress upon banks. It’s a good idea to develop a really great, open relationship with your regulator for this reason.

• Assign clear internal ownership and reporting structure with the authority to escalate and the time and resources to actually do the job.

• Right-size the contract to the risk. Audit rights, reporting requirements, clearly set roles and responsibilities and termination triggers should reflect what could actually go wrong, not a generic template.

• Set clear expectations with your fintech partner and hold them to it. Strong SLAs, spelled out and actually enforced, are often the difference between catching a problem early and finding out about it in an exam. It's usually one buried clause that mattered most, and nobody notices it until it's too late.

Do you have a fintech experience to share?

Are you considering dipping your toe in the water, have you jumped in, or are you watching from the shore? Have you had any issues with staffing with the right expertise or to support the volume of the business model? Share your experiences and questions in the comments.

Keep in mind, one Friday each month is Fintech Friday. Next month’s topic tackles topics such as staffing, navigating a Board of Directors on the fence about fintech, corporate governance structures, and the evolving Chief Payments Officer position.