Fintech firms must develop and implement policies that mirror those of the banks they partner with.
Monitoring tools enable companies to track third-party providers’ performance in real time.
Training and ongoing education will be central to any risk management program.
As fintech companies continue to grow and integrate with traditional banks, the importance of robust third-party risk management—within those fintech companies and for the banks that have relationships with them—is rising.
But challenges abound when ensuring that a bank’s third-party partners comply with the same stringent standards—including regulatory compliance—to which they are held. Failure to meet these standards can result in reduced access to capital, higher costs of doing business, reputational risk and potential regulatory penalties.
Fintech firms, often operating with dual roles within their organizations (e.g., chief financial officers also handling compliance), may not possess the necessary regulatory examination background, further complicating their compliance and any integration efforts.
Federal bank regulators continue to emphasize that effective risk management of third-party relationships is a high-priority topic and an area of concern, especially for banks that have a banking-as-a-service relationship with a fintech partner.
Third-party relationship guidance issued in June 2023 by U.S. federal regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., did not introduce new requirements per se, but clarified the risk management principles that regulators expect financial institutions to adopt. Further, through enforcement, regulators continue to emphasize the need for stronger practices across the relationship lifecycle, including compliance management and documentation to support planning, diligence and monitoring activities.
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) expects federally regulated financial institutions to manage third-party risks in a manner proportionate to the level of risk and complexity of a given institution’s third-party ecosystem. OSFI also notes that institutions should establish a third-party risk management framework that spans “the lifecycle of a third-party arrangement, from sourcing and due diligence of a third-party provider to potential exit from the third-party arrangement.”
For fintech companies and banks looking to make their third-party risk management frameworks more resilient and align practices with evolving regulatory expectations, the actions below can help chart the path forward.
Organizations should begin by determining where their framework exists along the maturity spectrum. For instance, does the framework consider emerging risks and include a clear timeline for regular updates? Does each party involved have the proper personnel in place to decipher and measure risks that accompany the partnership? This assessment can help reveal weaknesses and identify areas for improvement.
Fintech firms must develop and implement policies that mirror those of the banks they partner with. These include rigorous due diligence processes, continual monitoring of third-party activities and implementing corrective actions when necessary. Banks, on the other hand, should understand and prepare mitigation efforts to address any areas of risk that may arise from partnering with a fintech.
Advanced monitoring tools enable companies to track the performance and compliance of their third-party providers in real time. For smaller banks and fintech firms that lack the resources of larger institutions, leveraging technology can bridge the gap and ensure they meet regulatory expectations. Monitoring tools can also help organizations maintain a regular cadence of testing.
Fintech firms and banks can benefit from engaging third-party risk management advisors to help navigate the complex regulatory landscape. Advisors can assist in setting up robust risk management frameworks, conducting thorough assessments and providing ongoing support to facilitate compliance.
Training and ongoing education will be central to any risk management program. Organizations need to equip employees with the tools and knowledge to adapt to new or shifting regulatory requirements. Doing so will ensure a resilient framework well positioned to weather risk issues that arise.
