What does bank-fintech due diligence entail?

The news: For banks, possibly list of best practices when partnership with a fintech includes “do due diligence”. But few lists actually tell the banks what due diligence actually includes.

Here we highlight what you should look at when performing due diligence, per Forbes.

Why is due diligence important? Collaborating with a fintech offers many advantages: They help the banks accelerate their digital transformations, cutting costs, diversifying their customer base – the list goes on. But choosing the right partner takes work, and the wrong move can cause big problems.

• A fintech partnership is likely to change the risk profile of any bank. There are many types of risk a bank should consider when working together: operational, regulatory, liquidity, market, credit and reputational.
• Recent events, such as JPMorgan’s cooperation with fintech Sincerereveals that failure to conduct thorough due diligence can end up being an embarrassing and costly mistake.

So, what diligence is due?

• Make sure fintech can do what it says: Ensure that it can perform the desired services while maintaining proper risk controls. Also check that the partnership will add value to the bank’s brand and reputation.
• Verify the data: Don’t be afraid to talk to references. Confirm that the fintech’s user base exists and ask the firm’s other partners if they are satisfied with the fintech’s performance.
• Don’t stop at the beginning: Facts that were confirmed at the start of the relationship must apply for the duration of the partnership. Address any concerns early, such as service level agreement failures or data breaches. This will prevent revenue hits, extra costs and wasted time.
• Use your risk management programs and teams: Following established risk management processes to review risks surrounding the fintech partnership can provide banks with a complete picture analysis. It is also important to establish a unified implementation plan – and even an exit plan if the relationship does not work out.

What questions should a bank start with?

• Will partnering with a fintech benefit the bank, or will it require an unnecessary investment in staffing and compliance controls that could be better spent developing proprietary offerings?
• Does the fintech have its own risk management program, and is that team willing to work with the bank’s risk team?
• Have other banks or financial institutions partnered with this fintech? If so, have they renewed their contracts or expanded the relationship to include more features over time?

Bottom line: Banks should not take the due diligence process lightly. Many factors can throw due diligence off the rails, such as competitive threats, budget constraints and a desire to reduce an offer’s time-to-market. Have a plan before you start can help everyone stay on track throughout the process.