Taken from the blog of Sean Carter, AAP, NCP, President & CEO, NEACH.
There is a lot of conversation in the industry right now around the topic of how to create a successful FI/Fintech partnership, most of which focuses on identifying a startup that is the right fit for your institution. I’ve seen very little on the topic of the financial institution’s responsibility in the partnership, which is a topic I’d like to address.
Let me first say that partnering with a FinTech partner to create an innovative solution for your institution without first defining what problem you are trying to solve is unwise. It is imperative that financial institutions consider innovation and strategic partnerships within the context of their overall strategy and growth plan[1].
Questions to Consider
Further, in shaping its strategy, the institution may want to take into account answers to the following questions:
- Where do we want to go as an institution?
- How do we get there?
- What do our existing and potential new customers want?
It is equally important for financial institutions to address regulatory and compliance issues up front. Financial institutions need to make sure the FinTech is aware of and able to work within the constraints of the financial institution’s myriad rules and regulations.
The Greatest Challenge
The biggest challenge in partnering with a FinTech is a lack of awareness of regulations and how they translate to banks and credit unions. Banks must verify that FinTechs understand the impact of Reg. E, Reg. CC, the Nacha rules, and other regulations that apply. Further, financial institutions have to know how transactions settle and who is responsible for the loss should one occur.
Similarly, a financial institution should understand what operational due diligence questions to ask. Answers to strategically focused questions could highlight a deficiency or weakness in a product or uncover a serious lack of awareness/knowledge on the part of the FinTech. Understanding how a product or solution works helps when trying to mitigate risk. Financial institutions need to know what questions to ask outside of normal vendor management.
Financial Institutions’ Responsibilities
While many FinTechs are working hard to understand regulatory and compliance issues, it is ultimately the responsibility of the financial institution to address these issues at the start and throughout the project. Because smaller financial institutions usually don’t have devoted compliance groups, it is the responsibility of the people with expertise in the organization to guide this aspect of the project.
Regardless of where a financial institution is in deciding whether to partner with a FinTech for innovation, a failure to innovate and educate institution staff about the opportunities inherent in FI/FinTechs partnerships is unwise. It is NEACH’s belief that every financial institution needs to join the conversation about innovation and potential FinTech partnerships.
Join us at Innovating Payments 2019 to continue this conversation and to meet with members of the New England FinTech community.