Time and again, the fintech industry has defined itself in comparison to traditional banking. It’s part of the branding: famously conservative, slow-moving financial institutions versus agile tech powerhouses unencumbered by centuries of tradition and risk-averse thinking.
This seeming philosophical opposition between banks and fintechs is, some claim, a very good reason for them to collaborate. Analysts working for Bain and Company argue that partnering with fintechs could help banks move faster on digital product design, time to market, and security.
“Fintechs provided the technology, banks the funding and customers, with each augmenting the potential of the other,” note the analysts. However, they also note a successful partnership between a bank and a fintech is “not easy to source, implement, and manage.”
One of the reasons this is the case could be the fundamental differences in how each type of organisation approaches risk.
Banks are “responsible” for fintech partner risk management
Michael Hsu, the acting Comptroller of the Currency for the US government, has reservations about fintechs’ presence within the traditional banking ecosystem. As reported by Reuters, Hsu’s belief is that “Banks that work with financial technology companies to offer banking services should be actively managing risks associated with those relationships.”
A further report by the US Treasury department highlights the issue that “the presence of non-bank firms outside the bank regulatory perimeter—while offering a similar set of products and services that pose similar prudential risks as banks, such as deposit-taking and making loans and extensions of credit—poses a risk.”
Increasingly, the US banking sector appears to be embracing fintechs. For example, 39% of US banks have already partnered with a fintech to support payment facilitation and money movement. For context, the same percentage are planning to partner in the future. Also, 34% have already partnered with a fintech on a mobile wallet, with 21% more planning to do so in the future. The benefits fintech can provide to traditional banks are clear. More importantly, the banks themselves recognise the benefits.
However, the regulatory hurdles which many fintechs have managed to avoid so far will not be waived when it comes to their participation in traditional banking.
As Hsu insists, “We will not… lower our standards, create a special regime, or take an overly expansive view of banking to entice new entrants or in the hope of bringing a particular activity into the bank regulatory perimeter.” It appears that banks may be forced to shoulder increased regulatory risk when partnering with famously risk-tolerant fintechs. If that happens, it may erode a good deal of the appeal that created these partnerships in the first place.
- Fintech & Insurtech
