Pub. 12 2021 Issue 4

wvbankers.org 24 West Virginia Banker Federal Agencies Focus on Community Bank-Fintech Partnerships By Elizabeth Frame and Drew A. Proudfoot, Bowles Rice, LLP F inancial technology, or fintech, refers to the broad set of financial innovations that apply new technologies to a financial service or product. Although potential competition from fintech companies initially raised concerns for the banking industry, as consumer and regulatory demand for better technology increased, banks quickly recognized and adapted to the changing market. Today, banks have implemented fintech solutions for both back-end processes (monitoring of account activity) and consumer-facing products (applications to apply for loans and pay bills online). Many community banks now partner with fintech companies, often through their core processing service providers, to provide modern platforms and services to their customers, obtain data about their customers, provide individualized products and services, and increase security. The COVID-19 pandemic also forced banks and customers to innovate, often changing how banking transactions were conducted. Banks rushed to provide solutions to open accounts and close loans remotely. These critical fintech solutions heightened banks’ awareness of the need to analyze their fintech strategy, including the processes and products that need to be changed and the best model to pursue that change. Recognizing that innovation and evolving customer preferences are changing the financial services landscape, in August, the Federal Reserve Board, the OCC and the FDIC (the “Agencies”) jointly published Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks (the “Guide”). Intended to assist community banks in assessing the risks when partnering with fintech companies, the Guide draws on existing regulatory requirements and supervisory guidance on third-party relationships. It is consistent with recent proposed interagency guidance on how banks should manage the risk inherent in their third-party relationships. More importantly, the Guide likely signals that management of this risk will receive increased scrutiny and focus in the bank examination process. The Guide emphasizes that “[e]valuating a fintech[’s] business experience, strategic goals, and overall qualifications allows a community bank to consider a fintech[’s] experience in conducting the activity and its ability to meet the bank’s needs.” The scope and the depth of the diligence process should be properly calibrated based on the degree of risk posed to the bank and the nature and criticality of the contemplated relationship. Although the Guide specifically addresses community banks (i.e., banks with less than $10 billion in assets), the Agencies note that it can provide useful guidance to banks of all sizes. The Guide provides relevant considerations and helpful examples of how community banks may identify and mitigate risks through appropriate due diligence. Specifically, the Guide covers six areas of due diligence