Last week, the Federal Reserve Board published a paper on partnerships between community banks and fintech companies, “Community Bank Access to Innovation through Partnerships.” The Fed’s publication of the paper is another indication of the increased attention that regulators are paying to bank relationships with fintechs. It follows the publication at the end of last month of a guide by the Fed, OCC, and FDIC that is intended to assist community banks in conducting due diligence when considering relationships with fintechs.
The Fed paper is based on outreach to community banks in which the discussions focused on the strategic and tactical decisions that support effective partnerships. The paper discusses three broad partnership types and their associated benefits, risks, and challenges as perceived by bankers as well as bankers’ views on the key considerations in establishing effective fintech partnerships.
The three partnership types discussed are:
- Operational technology partnerships aimed at enhancing a bank’s processes, monitoring capabilities, or technical infrastructure
- Customer-oriented partnerships in which a community bank engages a fintech to enhance various customer-facing aspects of its business (e.g., account opening) and the bank continues to interact directly with its customers
- Front-end fintech partnerships in which a bank’s infrastructure is combined with technology developed by a fintech, with the fintech interacting directly with the end-customer in the delivery of banking products and services
The three key considerations in establishing effective fintech partnerships identified by bankers are:
- A commitment to innovation that is shared by the bank’s senior management and board of directors, has staff buy-in, and is supported by an environment in which technology professionals are part of the bank’s strategy and broader team
- An alignment of priorities and objectives between the fintech and bank, such as mutual emphasis on the importance of compliance with banking regulations
- A thoughtful approach to connectivity in which connections with fintechs are part of an integrated process that allows information to flow across systems and siloed bank processes are eliminated when possible