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Fintechs Lead the Way for Digital Transformation in Financial Institutions

Fintechs and financial institutions are natural partners. Fintech companies have the solutions that banks need to advance in digital transformation and keep up with changing consumer needs.

The banking industry is highly regulated


and regulators hold financial institutions responsible for the actions of their partners.



Here's what you can expect to learn on this page:

Regulatory Compliance 101

Managing the myriad of laws and regulations



Banking is regulated at both the federal and state level, and financial institutions are regularly examined banks and credit unions for compliance with a bevy of regulations.





Regulations cover these areas:

  • Safety and soundness. The ability of a financial institution to avoid failure by maintaining strong financials, operations, and management.

  • Detecting and reporting illegal financial activity, such as Bank Secrecy Act and anti-money laundering. The government expects financial institutions to report suspicious financial activity to authorities.



  • Deposit regulations. Laws regarding checking and savings accounts and electronic funds transfers (EFTs), including funds availability, interest, and disclosures, among other areas.

  • Loan regulations. Laws regarding mortgage loans, credit cards and other credit products, covering key areas such as annual percentage rates, disclosures, and servicing and appraisal requirements.

  • Consumer protection. Prohibitions against acts and practices considered unfair, deceptive, or abusive in banking.

  • Data security & privacy. Ensuring that sensitive customer data is protected—everything from cybersecurity to internal access controls.

  • Fair lending. Fair lending laws make discrimination illegal. For example, lenders are prohibited from considering race, color, national origin, religion, sex, familial status, or disability when applying for residential mortgage loans. While this falls under loan regulations because it is a high enforcement priority.

  • Business continuity. Documenting, reviewing, and testing plans to ensure business resilience and prompt disaster recovery.

  • Vendor management. Ensuring that vendors under contract with a financial institution are given proper oversight and risk management.



  • Data collection and reporting. Submitting accurate data to the regulators about the institution’s financial health, mortgage lending, customer repayment and other areas.




With new rules and regulations constantly being added, fintechs must navigate the twin challenges of overlapping requirements and change management.
This is where an attitude of agility will serve you well.



Regulatory challenges fintechs need to be aware of:


  • Overlapping in requirements. Compliance requirements don’t fit into tidy categories. One action can trigger violations (and financial penalties) across numerous rules. 

  • Constant change management. You must not only ensure compliance with existing regulations, but continually adjust operations to adapt to new requirements.




"How important is regulatory risk to community banks & credit unions?"




say staying on top of regulatory risk is important or very important when it comes to their survival and growth.1


If you're working with a financial institution


You may be wondering, what are some of the regulations that apply to you?


Our internal compliance expert Stephanie Lyon breaks down the "alphabet soup" of CFPB regulations you need to know about.



Compliance Management Systems

What is a CMS?

Federal regulators require financial institutions to have a compliance management system (CMS).

A CMS is how an organization:

  • Learns about its compliance responsibilities
  • Incorporates them into business policies
  • Ensures employees understand them and carry them out
  • Takes corrective action as needed (including responding to customer complaints)

This is more than a check-the-box activity. Examiners expect financial institutions to demonstrate and document a culture of compliance where the board and management take their compliance oversight responsibilities seriously.

Compliance programs should be proactive and have sufficient resources so that weaknesses can be identified and corrected before examiners find them.

The price of failure is high.



In 2021, the CFPB forced GreenSky, a fintech that lets merchants offer financing to consumers, to refund or cancel up to $9 million in loans and pay a $2.5 million civil penalty for violating UDAAP (Unfair, Deceptive and Abusive Acts and Practices).

Do Fintechs Need a CMS?


Unlike financial institutions, fintechs aren’t required by law to adopt a compliance management system—but that doesn’t mean fintechs don’t need a CMS.


Fintechs need to know which federal and state laws apply to them. They need policies, procedures, and processes to ensure they implement new laws, remain compliant with existing laws, and correct problems.

A CMS is so important that when investigating a company, the Justice Department takes a close look at the company’s compliance program and considers it as a factor when deciding whether to bring charges, negotiate plea agreements, or calculate criminal fines.




Financial institutions are required to assess the compliance risk posed by third parties, especially critical relationships that involve sensitive customer data or have the possibility to knock essential bank functions offline.



That’s why a CMS can be a valuable tool for fintechs
that want to partner with financial institutions.



Financial institutions need to be certain a fintech has:

  • Knowledge of both new and existing regulations

  • Policies and procedures in place to implement them

  • Proactive monitoring of compliance activities

  • Audit and control features that demonstrate their compliance

  • Up-to-date logs and compliance documentation

The best and most efficient way to do this is through a compliance management system. A CMS not only helps a fintech company navigate the compliance lifecycle, it shows potential partners that the company is committed to a culture of compliance.



Learn more about why a CMS is an essential tool for fintechs to build effective partnerships with banks.




Vendor Management for Fintechs

Understanding Third-Party Risk




Fintechs play an important role at financial institutions—allowing banks and credit unions to offer innovative products and streamlining back-office operations to be more efficient and effective.


Vendor Management Hub-hero-01



Working with a fintech—or any third party—means trusting that company with the institution’s sensitive data, reputation, and business resiliency. One careless vendor can interrupt operations, cause a data breach, or create a compliance nightmare for a financial institution. Regulators will not accept “it was the vendor’s fault” as an excuse. They will hold the institution responsible for its vendor’s actions—and that can involve steep penalties.



In 2020, Morgan Stanley paid a $60 million civil money penalty for poor vendor management that could have exposed sensitive customer data.6

Morgan Stanley also paid another $18 million penalty when a different third-party servicer it used violated the Flood Act.

Implementing Vendor Management

Financial institutions are required to have strong vendor management programs to reduce third-party risks (and because it’s a regulatory requirement).

Vendor management is all about identifying, measuring, monitoring, and mitigating risks. It’s an ongoing process that can be broken down into four phases:

  • Risk assessment. Ensure the business relationship aligns with the institution's strategic plan and risk tolerance. Identify high-risk (critical) vendors that require extra supervision.
  • Due Diligence. Due diligence. Assess the vendor’s financials, experience, legal and regulatory knowledge, reputation, operations, and controls.
  • Contract negotiation. Specifically outline rights and responsibilities, including provisions that ensure the institution has access to due diligence documents. It should also ensure transparency into fourth-party vendors (the vendor’s vendors).
  • Ongoing monitoring. Real-time and period due diligence to ensure vendor is meeting contractual obligations and remains a strong, effective partner.

Fintechs rely on critical third-party vendors. If one of these vendors fails, it can create huge disruptions for both the fintech and its financial institution partners.


That’s why the regulatory agencies require a financial institution’s vendor due diligence to considered fourth-party risk, or the risk a vendor’s vendors poses. The institution needs to know which critical activities are outsourced and what controls and monitoring your fintech has in place to ensure fourth-party vendors are resilient, compliant, and keeping data safe.




Fintechs that want to work with financial institutions must demonstrate a strong commitment to vendor management, including transparent vendor management processes—or financial institutions will decide the partnership is too risky.



Financial institutions expect fintech partners to have effective vendor management programs. Learn more about managing third- party risk.


Read how to position your Fintech for a successful partnership through the lens of risk management broken down by category:



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What's Next?

If your fintech company wants to partner with banks, you need to be prepared.


Our guide, Partnering with Financial Institutions: What Fintechs Can Do to Prepare, is packed with information and practical steps to help your fintech lay the groundwork for effective partnerships that support digital transformation for banks and credit unions, while managing compliance and risk.





Learn more about Fintech Solutions >