OCC Examines Risks Arising from Bank-FinTech Partnerships

At the Clearing House and Bank Policy Institute’s annual conference, Hsu noted the benefits of such partnerships, citing access to technological innovation at a lower cost for banks and a reliable reputation by association with FinTechs. But because of the exponential growth of bank-FinTech partnerships and the complicated structures that often make it difficult to decipher “where the bank stops and where the tech firm starts,” Hsu expressed concern about a potential “race to the bottom with pressure to cut corners for compliance.”

Implications of digitalisation

In his statement, Hsu noted that the benefits of digitization and third-party dependencies come with increasingly complex financial, compliance and resilience risks. “Technological advances can offer greater efficiency for banks and their customers,” Hsu said. “However, the benefit of these efficiencies is lost if a bank does not have an effective risk management framework in place, and the impact of significant deficiencies can be devastating.”

Under Hsu’s leadership, the Office of the Comptroller of the Currency (OCC) has adopted a “cautious and prudent” approach to rapid digitization in the banking sector, as seen in OCC’s five-year strategic plan.

Hsu also shared that the OCC is working closely with colleagues across agencies to help ensure a common understanding of the evolving financial system and how regulatory arbitrage and the race to the bottom can be minimized.

Subdivision of banking FinTech schemes

Committed to avoiding a repeat of the 2008 financial crisis, the OCC is currently working on a process to divide bank-FinTech partnerships into cohorts with similar safety and soundness risk profiles and attributes.

Hsu noted that this will enable a clearer focus on risk and risk management expectations, while reducing the risk of “nasty surprises” arising from banking FinTech schemes.

Important takeaways

A FinTech that wants to work with a bank should ensure that it has necessary risk-based regulatory guidelines, programs and procedures regulators and banks expect to build and maintain. In the same way, a bank considering collaborating with a FinTech must know in-depth supplier due diligence regulators expect a bank to commit before engaging a FinTech. In either case, anti-money laundering (AML) compliance must not be an afterthought for either party.

FinTechs looking to introduce innovative products, services and processes designed to improve AML efforts or offer new financial services options to consumers and businesses should consider joining FinCEN’s Innovation Hours Program.

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