IRM can help bank and fintech partnerships grow stronger

The relationship between banks and financial technology companies (fintechs) is complicated because both types of companies often compete with each other to expand their businesses and attract more customers. However, many banks and fintechs realize that it might be better to strategically work together.

This mutual cooperation is rarely straightforward, though. It’s more like “co-op-etition.” If you're managing a bank, you might be collaborating with one or more fintech companies, but you’re also competing with them at the same time – and vice versa.

Any bank and fintech partnership inherently creates risk. These risks might be different than a more traditional vendor relationship, such as nuanced data privacy, information security, and regulatory compliance risks, which can make the relationship even more complicated. But the mentality doesn’t need to be adversarial. Banks and fintechs can overcome their challenges and enjoy mutual benefits by aligning strategies, embedding operational excellence, and taking an integrated approach to risk management.

What’s the main difference between banks and fintechs?

One of the biggest, and most basic, differentiators between a bank and a fintech is that banks need a charter to legally conduct business. The bank must comply with the charter’s guidelines along with all the relevant rules, regulations, and laws.

A fintech doesn’t need a charter to operate. Fintechs’ reach has expanded over the past decade because these companies provide quick, easy-to-use financial services platforms. Examples of fintechs include companies that offer payments, banking-as-a-service apps, alternative lending, crowdfunding platforms, and cryptocurrency.

To offer these services, fintechs often work with banks that are licensed to perform financial transactions. This relationship is critical for fintechs.

Banks can do business without fintechs, but they wouldn’t be nearly as competitive or agile, which is especially true for small and midsize banks that don’t have the same resources as their larger competitors to build technology internally.

Banks like to work with fintechs because they can move fast.

A bank’s charter requires compliance with various local, state, and federal rules. Fintechs don’t always have to follow the same rules or operate under the same degree of regulatory scrutiny, so they can sometimes introduce new technologies faster than banks can.

For banks, fintech partnerships provide an opportunity to create value. If a bank partners with a fintech, it might be able to bring new features or options to market faster. Doing so can help its customers and substantially increase its footprint through well-established fintech brands that operate on a national scale.

Fintechs want to work with banks because banks can help with risk.

Many fintechs have a different risk appetite than banks because they operate more like technology firms and take an agile approach to development. Usually, a fintech’s primary focus is on creating positive customer experiences, such as expanding inclusion of the un- or underbanked into the financial services ecosystem.

It’s not that fintechs inherently want to take on higher levels of privacy, cybersecurity, regulatory, or operational risk. Instead, they want to disrupt the norm and provide new products or offer them in different ways. Fintechs tend to seek efficient ways to manage and monitor risk so they don’t have to slow down their pace of growth and innovation. 

Due to the complexities of fintech regulatory supervision (for example, differing regulations state by state), banking regulators often expect the banks to monitor and manage the risk involved in their fintech partnerships. For most fintechs, this dynamic works just fine. Fintechs prefer that banks provide expertise to help set up appropriate risk management programs so the fintech’s personnel can focus their energy on improving their technology products.

Risks exist within bank and fintech partnerships.

It’s hard enough to manage risk within the four walls of your company. With bank and fintech partnerships, the relationship creates new risks that need to be managed even though banks and fintechs might not have full visibility into the other’s business operations.

If you're managing a bank, you might be trying to decide if a fintech is conducting secure business that meets regulatory requirements. That can be tough to do if you don’t have visibility into the fintech’s operations.

On the other hand, if you're running a fintech, you might be more focused on fraud and resiliency. Transactions need to be safe and secure or customers might flee in droves. Or, if service is unavailable to customers for an extended period of time, that can negatively affect a fintech’s bottom line.

Fintechs rarely enjoy long-term customer loyalty due to the relative newness of their products and services, aggressive market competition, and lack of product “stickiness.” If consumers no longer like the fintech, they might simply delete the app and download a new one.

Banks frequently view fintechs as third parties for risk management purposes, but there’s no universally agreed-upon way to manage that relationship and no two bank-fintech partnerships are exactly the same.

Integrated risk management can help bank and fintech partnerships thrive.

Risk management for both banks and fintechs comes down to responsibility and accountability in the partnership or sponsorship model. Fintechs are responsible for executing on behalf of the banks, and banks are accountable for managing applicable regulations and finances. The easier it is to manage those relationships, the more opportunity exists to optimize and innovate rather than remediate or investigate any issues. With integrated risk management (IRM), you can move from protecting business value to creating business value. 

It’s difficult when one side of the bank-fintech partnership has more information than the other because it can lead to miscommunication and unnecessary or irrelevant workflows. IRM provides more visibility into risk, which allows banks and fintechs to align their operations with strategy by using similar data. 

By streamlining data with risk measurement, monitoring, and reporting, you can more quickly create growth opportunities for banks and fintechs to work together.

The crux of what you want is shared information and transparency into opportunity and risk. And that’s why having a technology that sits squarely at the center of all these relationships is important.

Crowe IRM-as-a-Service helps banks and fintechs manage their risks. 

Crowe risk management professionals have years of experience helping banks and fintechs achieve integrated risk management, and that experience led us to create Crowe IRM-as-a-Service. This innovative solution provides a central hub for risk and compliance activity and helps streamline communication between banks and fintechs. Once the banks and fintechs can access content that helps them speak the same language, they can explore growth strategies with agility and speed. 

To learn more or schedule a consultation and demo, visit the webpage for Crowe IRM-as-a-Service.

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Have questions about how Crowe IRM-as-a-Service can help banks and fintechs work together? Get in touch – we’d love to chat.

Clayton J. Mitchell

Managing Principal, Fintech

+1 317 208 2438

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Gayle Woodbury

Principal, Integrated Risk Management Leader

+1 630 586 5325

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