On February 24, 2020, the FDIC, through its FDiTech initiative, released a guide (“Guide”) to assist fintech companies working with banks understand the process that banks must undertake in entering and maintaining business relationships with fintech providers.
The Guide provides an executive style overview of the vendor management and risk management processes that fintech companies will undergo prior to onboarding with a bank. It also provides a high-level framework of considerations that fintech companies must be prepared to address as part of these processes, including being prepared to show that the fintech provider has:
- Understanding of the legal framework that apply to banks and relevant to the fintech service involved;
- Monitoring systems in place appropriate to the fintech service provided;
- Control systems in place to ensure mitigation of risk, including systems to ensure privacy and confidential information; and
- A well-managed and financially strong business.
To show the above, the Guide suggests that fintech companies need to maintain written policies and procedures, appropriate infrastructure in place relevant to the fintech service provided, and detailed business information. It also reminds that a fintech vendor’s relationship with a bank must be governed by a written agreement that meets regulatory guidance.
Takeaways
The Guide is yet another reminder for fintech companies that providing fintech products and services to banks requires understanding of the regulatory framework in which banks operate. Too often fintech companies develop a product or service for the financial industry only to learn after development completion that the processes involved do not meet disclosure requirements, contain risky or prohibited practices, have privacy risks or trigger fair lending concerns. Fintech companies would be best served to include legal counsel with relevant expertise as part of the development team and that can provide legal support to the sales and executive teams in responding banks’ and regulators’ inquiries.
If you have any question regarding the vendor and risk management in connection fintech providers, the Guide or fintech product legal support, please reach out to Solomon Maman.
Author
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Solomon has nearly two decades of experience representing financial institutions, real estate investors and privately owned business entities. Solomon concentrates his practice in the areas of banking, consumer financial services, real estate, business law and related litigation and appellate practice.
