Which financial institutions do the best job managing fintech relationships? How do they work with third-party fintech partners that aren’t necessarily experts on financial services and consumer finance regulation?
The Fed’s spilling the tea on fintech risk management in its December 2019 Consumer Compliance Supervision Bulletin. The agency’s insights into consumer compliance activities are all about sharing examiners real-world observations and practical advice for avoiding common missteps.
Step one is managing the risk of a fintech collaboration by identifying and mitigating risks. It sounds basic, but the Fed finds it a real problem. “…we have found that when the risks are not identified and mitigated in advance, the unintended consequences may harm consumers, result in legal violations, and be costly for the bank to resolve, both from a monetary and reputational perspective.”
While fintech partnerships may be new, current best practices for managing risk in traditional third-party vendor products and services are up to the job of managing fintech risk, the Fed says. This includes risk and vendor management basics like:
Online and mobile banking platforms can increase the risk of unfair or deceptive practices (UDAP) violations, the Fed notes. One of the most common violations is failing to provide consumers accurate account information and disclosures.
UDAP violations have stemmed from:
These failures caused consumer harm in the form of finance charges, late fees or negatively impacting their credit report. They could have been avoided with controls like:
Other common risks include failure to evaluate and validate online and mobile banking platform modifications and failure to monitor its compliance risk management systems.
The Fed is expected to unveil its Innovation Policy Office next year just like other banking supervisory agencies have already done with their offices of innovation. Already the agency launched a section of its website dedicated to fintech innovation and announced plans to hold a series of "fintech innovation office hours" across the country.
Banks and fintech firms will meet one-on-one with Federal Reserve staff members. The first session will be February 26 at the Federal Reserve Bank of Atlanta.