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Q&A: Tips for Financial Institutions Evaluating Fintech Relationships

4 min read
May 28, 2024

When it comes to vendor management, fintechs are in a category of their own. What’s the difference between fintechs and other vendors, and what goes into evaluating a fintech? 

We asked Denise Guira, NCRM, CRVPM, NCVMP, a vendor management expert and solution advisory manager on the Ncontracts Solution Advisory team, for insights from her years of experience at community financial institutions. 

Here’s what she had to say:

What’s the difference between a fintech and other third-party service providers (TSP)?  Should a financial institution evaluate a fintech the same as any other vendor?

Denise Guira: There is a difference between fintechs and other third-party vendors. There are a lot of strategic risks associated with working with a fintech. Financial institutions partner with fintechs because they see a better, faster way to access new technology. Fintechs can devote resources to developing technology and building a better experience – and do it in a way that’s flexible and adaptable. 

But because they tend to be newer and less experienced, fintechs may not have the due diligence documentation a more traditional vendor would. It’s why the Office of the Comptroller of the Currency published the booklet Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks. It recognizes those challenges when it comes to fintech due diligence.  

Right now only the OCC has a booklet, so it’s kind of The Wild Wild West when it comes to what examiners are going to ask for.

What is the strategic risk of working with a fintech? 

Denise: One of the biggest strategic risks is proof of concept. A fintech may have great ideas and a great plan, but a financial institution that chooses to be one of a fintech’s first customers may not get what they are expecting or promised.

Related: Regulators Crank Up the Heat on BaaS Banking. What Does this Mean for Third-Party Risk Management?

How do you evaluate the strategic risk of working with a fintech? 

Denise: There are two major questions you need to ask when evaluating the strategic risk of a potential fintech relationship: 

  • What happens if you partner with this fintech? 
  • What happens if you don’t?  

If you partner with a fintech and it doesn’t deliver on what it’s promised, there is risk there and financial institutions understand that. You might partner with a loan originator and the loans you were expecting to book never materialize.  

But there is also risk if you don’t evolve and take advantage of new technologies. If all your competitors are embracing a product or service and your institution holds back because it’s afraid of the risk and unknowns, it’s still creating a risk. It’s the risk of the status quo. You’re not evolving your processes, you’re not making things more efficient, but your competitors are gaining all these benefits.    

The challenge is balancing the due diligence you have access to against the strategic risk of entering the partnership vs. sitting on the sidelines. And making sure you pour over the due diligence documents to really understand who you are partnering with.

Related: Are Fintechs the Future?

What advice do you have when evaluating fintech relationships and strategic risk? 

Denise: It really depends on the leadership and appetite for strategic risk of the institution. You need to recognize that sometimes you do all the due diligence and analyze everything, move forward feeling good, and it still doesn’t work out – especially when there isn’t proof of concept. You might sign a contract based on a prototype and it just never comes to fruition.  

When you’re taking a leap of faith on a newer, untested technology, you need to mitigate that risk with really strong contract provisions that outline expectations of what each party is going to deliver. Along with deliverables, there should also be an exit clause. 

You need to be able to absorb the risk of things not working out. Is it a product that’s nice to have? Or is it something that must work on Day 1? What safety nets do you have in place? Can you afford to take the financial loss? 

If it’s a newer, nice-to-have product with a low cost, you might feel comfortable moving ahead with a fintech with no references knowing you’re the proverbial guinea pig.  

Or if you’ve got strong processes in your call center and would like to add voice recognition technology to make things more efficient, if the technology doesn’t work out, you at least will still have the same strong foundation. It won’t ruin what you already have.    

On the other hand, if you’re the last financial institution on the block to adopt a technology and you’re being left behind, it’s probably not the time to choose a fintech partner without an established track record.

Are there any areas of risk that don’t get as much attention as you think they deserve? 
Denise: Yes, reputation risk is very real, and it doesn’t always get the attention it needs. Imagine a financial institution that adopts a new technology to update its online banking for a better experience, but instead of an improved experience, the institution ends up with a 10-day outage. Consumers are angry – with good reason – because they can’t access their funds or information about their funds without going to the branch. They are overdrawing accounts. They can’t transfer funds to pay their bills. The institution has no idea when services will be back up and running. It’s in the news and depositors are taking their money and going to other institutions.  

This isn’t a hypothetical. Events like this happen. When evaluating the vendor and its technology, you need to ask what’s the worst-case scenario, do the work to evaluate how it likely it is to happen, and then what you’d do if it happens. In a digital world, having online banking is table stakes, and if a disruption takes it away from consumers, the house is going to lose.  

Any advice for choosing a fintech partner? 

Denise:  You need to be very sure they have a strategic plan that you’re comfortable with. Their strategy and vision must align with yours.

Are You asking the right questions of your vendors?

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