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OCC Scrutinizes Risks Arising from Bank-FinTech Partnerships

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On September 6, 2022, acting Comptroller of the Currency Michael J. Hsu warned that bank-FinTech partnerships and their foray into the world of payments and lending could lead to increased risk for the banking industry. 

At the Clearing House and Bank Policy Institute’s Annual Conference, Hsu noted the benefits of such partnerships, citing access to tech innovation at a lower cost for banks and a trustworthy reputation by affiliation for FinTechs. However, due to 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 over a potential “race to the bottom with pressure to cut compliance corners.”

Implications of digitization

In his statement, Hsu noted that the benefits of digitalization and third-party dependencies come with increasingly complex financial, compliance, and resiliency risks. “Technological advances can offer greater efficiencies to banks and their customers,” said Hsu. “The benefit of those efficiencies, however, is lost if a bank does not have an effective risk management framework, and the effect of substantial deficiencies can be devastating.”

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

Hsu also shared that the OCC is working closely with interagency peers to help ensure a shared understanding of the evolving financial system and how regulatory arbitrage and races to the bottom can be minimized.

Subdividing bank-FinTech arrangements

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

Hsu noted that this will enable a clearer focus on risks and risk management expectations while mitigating the risk of “nasty surprises” arising from bank-FinTech arrangements. 

Key takeaways

A FinTech looking to partner with a bank should ensure it has the necessary risk-based regulatory policies, programs, and procedures regulators and banks expect to build and maintain. Similarly, a bank considering partnering with a FinTech must know the in-depth vendor due diligence regulators expect a bank to undertake before engaging a FinTech. In both cases, anti-money laundering (AML) compliance must not be an afterthought for either party.

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

 

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On September 6, 2022, acting Comptroller of the Currency Michael J. Hsu warned that bank-FinTech partnerships and their foray into the world of payments and lending could lead to increased risk for the banking industry.  At the Clearing House and Bank Policy Institute’s Annual Conference, Hsu noted the benefits of such partnerships, citing access to tech innovation at a lower cost for banks and a trustworthy reputation by affiliation for FinTechs. However, due to 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 over a potential “race to the bottom with pressure to cut compliance corners.”

Implications of digitization

In his statement, Hsu noted that the benefits of digitalization and third-party dependencies come with increasingly complex financial, compliance, and resiliency risks. “Technological advances can offer greater efficiencies to banks and their customers,” said Hsu. “The benefit of those efficiencies, however, is lost if a bank does not have an effective risk management framework, and the effect of substantial deficiencies can be devastating.” Under Hsu’s direction, the Office of the Comptroller of the Currency (OCC) has adopted a “careful and cautious” approach to rapid digitization in the banking sector, as evidenced in the OCC’s five-year strategic plan. Hsu also shared that the OCC is working closely with interagency peers to help ensure a shared understanding of the evolving financial system and how regulatory arbitrage and races to the bottom can be minimized.

Subdividing bank-FinTech arrangements

Committed to avoiding a replay of the 2008 financial crisis, the OCC is currently working on a process to subdivide bank-FinTech partnerships into cohorts with similar safety and soundness risk profiles and attributes.  Hsu noted that this will enable a clearer focus on risks and risk management expectations while mitigating the risk of “nasty surprises” arising from bank-FinTech arrangements. 

Key takeaways

A FinTech looking to partner with a bank should ensure it has the necessary risk-based regulatory policies, programs, and procedures regulators and banks expect to build and maintain. Similarly, a bank considering partnering with a FinTech must know the in-depth vendor due diligence regulators expect a bank to undertake before engaging a FinTech. In both cases, anti-money laundering (AML) compliance must not be an afterthought for either party. FinTechs looking to introduce innovative products, services, and processes designed to enhance AML efforts or provide new financial services options to consumers and businesses should consider joining FinCEN’s Innovation Hours Program.   [cta_card title="A Spotlight on Financial Crime" cta_img="" category="" bodytext="Stay on top of regional trends and novel criminal techniques so you can protect your business from financial crime." cta_text="Download now" cta_url="https://complyadvantage.com/insights/the-state-of-financial-crime-2022/"]

Originally published September 16, 2022, updated September 16, 2022

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