Fintechs and Risk Management

Fintech providers play an important role in the financial services industry. Banks and credit unions rely heavily on fintechs to sustain compliant efficient operations, process payments and other data, protect information and deliver service to customers in a variety of ways. Partnerships with fintechs offer expertise you may not otherwise have the resources to acquire. Thus, the reward for engaging with trusted providers. On the other side of the reward equation is risk inherent with third-party relationships.

The volume and value of merger and acquisition (M&A) activity among the fintech industry is increasing. We will see a steady pace of marriages between fintechs focused on diversifying their feature, functionality, and system integration efforts with fintechs looking to embark on an exit strategy. Today is the time to revisit current vendor/partner relationships and identify those partners who are better aligned with your FI. There are three areas – which are not always easy to explore – that you should focus on during vendor reviews and evaluations in an era of heightened M&A activity.

1. Culture. Consider and discuss the fintechs you work with today. Talk about their culture and where you do and don’t have cultural alignments. Consider the fintech’s philanthropy. Are they servant leaders? Is that important to you? How do these providers support their own communities? Consider the fintech’s customer service and support reputation and history. Can you rely on the providers to sustain service and support levels consistent with your expectations? Take a close look at your FI’s sales culture and compare it to the sales culture from your providers and partners. Are they pushy or aggressive in their sales tactics while your FI may take a more relaxed approached, or vice versa? How well have your providers lived up to their promises and how does that compare to your FI?
2. Financial performance. There are some great companies delivering reliable, predictable, progressive technology platforms. But, what if one or more of your fintech providers is struggling financially and now forced into selling, reducing their employee-count, discontinuing unprofitable programs, sending you significant fee increases, or cutting back on investments in new product development or enhancements to existing products? As we speak, there are fintechs relying on varying combinations of these measures to sustain operations. This may be similar to lending money to a borrower with a questionable ability to repay the debt. Should your FI commit to long-term relationships with providers currently facing or known for historical financial difficulties?
3. Transparency. It’s often difficult to see deep into the operations of other companies, even those you trust with mission-critical systems. Thankfully, some of the most trusted and relied-upon fintechs are publicly traded companies. But not all of these companies provide the same level of transparency. The details with respect to their financial performance and strategic objectives are readily available. But, what about their investments in their employees, infrastructure, products, and services? Do you have an invitation to tour their facilities, meet with key executives and talk with other FIs for which the company provides products and services?

Seeking partnerships with stable fintechs aligned with your FI’s culture is increasingly important. Especially in an era of M&A activity. Transparent and responsibly managed companies reporting fiscal independence will be important factors to consider as you review vendor relations. Emotional intelligence has a place in determining which person(s) and companies you choose to do business with. In the end, FIs and fintechs depend on each other to thrive and the result is we continue to accomplish great things together.