Financial technology, commonly referred to as FinTech, describes many different things relating to financial services companies’ activities and capabilities. From the automated teller machines of the 1960s through today’s online lending platforms with unique algorithms for underwriting, FinTech has represented—and continues to represent—great challenges and opportunities for financial institutions. Indeed, as more FinTech companies emerge and establish new partnerships with traditional financial institutions, federal and state regulators are taking notice, and even getting in on the innovation game themselves. But it is not all smooth sailing: Financial institutions should consider the risks and compliance challenges that partnering with FinTech presents.
Broadly, FinTech refers to the use of technology in delivering a financial product or service. This technology may be an online loan origination model that uses novel data points to determine creditworthiness, payments technology that allows for faster or more secure payments to be sent, or online “wallets” that can be used for automatic savings or other electronic transfers.
Consumer Protection Laws
FinTech is gaining significant traction with financial institutions, particularly FinTech that focuses on the customer experience. However, its appeal presents financial institutions with significant compliance considerations, particularly in a few hot button areas, including fair lending; unfair, deceptive, and abusive acts or practices; data security; and privacy. As bankers know, many of these consumer protection laws and regulations apply without regard to the kind of institution providing the consumer financial product or service; therefore, financial institutions constantly need to consider the full slate of consumer protection laws and regulatory activity in this area.
Third-Party Risk Management and Anti-Money Laundering
In addition to considering consumer protection laws, financial institutions should also carefully consider two other hot-button areas of compliance intersecting with FinTech: third-party risk management and anti-money laundering. Third-party relationships have taken a front row seat lately with financial institution regulators at both the state and federal levels. Over the past few years, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau have each released new or updated guidance in some form. Some of this guidance predates the Dodd-Frank Act, particularly guidance related to third-party relationships and vendor risk management.
Institutions must also pay particular attention to complying with Bank Secrecy Act and anti-money laundering (BSA/AML) laws and regulations, because if they don’t, they face both financial and reputational risks. These risks are heightened for firms operating largely in an online electronic environment, such as FinTech. In that environment, some customers intentionally use digital currency or other methods of transacting business electronically to evade BSA/AML red flags. These and other developments have caused institutions’ BSA/AML compliance obligations to increase. Further, new regulations require certain financial institutions to acquire beneficial ownership and control person information for legal entity customers. Moreover, state and federal regulatory agencies have widened their nets. They are reviewing BSA/AML compliance for their regulated entities as well as those entities’ vendors, and are focusing on broader sets of activities and exposures.
Many regulators have taken a keen interest in FinTech, some even to the point of exploring proposals to introduce new licensing and compliance requirements. Most notably, on December 2, 2016, the OCC announced that it would establish a chartering process for FinTech companies under its authority to grant special purpose national bank charters. The OCC has also published a draft supplement to its licensing manual, “Evaluating Charter Applications from Financial Technology Companies.” The supplement details how the OCC will apply its existing licensing standard and requirements to FinTech companies that apply for a special purpose national bank charter.
The FDIC has also waded into the FinTech waters by outlining its concerns about the risks associated with marketplace lending. In one publication, the FDIC focused on the importance of effective risk identification for banks conducting business with marketplace lenders and identified specific risk categories banks should monitor, including third-party compliance risk, as well as transaction, servicing, and liquidity risks.
Finally, the CFPB has been accepting consumer complaints regarding online marketplace lenders making consumer loans. It also issued a Consumer Bulletin outlining the basics of marketplace lending. And it has initiated its Project Catalyst with the mission of encouraging consumer-friendly innovation in the markets for consumer financial products and services.
FinTech clearly has a future in the financial institution marketplace. Its future will involve the continued integration of financial technology—not a wholesale replacement of financial institutions. But traditional banking institutions can put FinTech offerings to good use. FinTech should be embraced by traditional banking institutions as an efficient channel for customer development and retention, among other things. And while financial institutions face compliance and vendor management considerations, they may consider partnering with FinTech as a potential growth strategy.
About Schiff Hardin’s Financial Institutions Team
Schiff Hardin has a dedicated team of financial institution transactional, regulatory, and litigation attorneys with significant experience handling various aspects of bank and non-bank financial institution matters. Our attorneys regularly advise financial institutions on corporate matters, mergers and acquisitions, regulatory compliance, enforcement matters, and litigation throughout the U.S.
For more information, contact the authors or visit Schiff Hardin’s Financial Institutions practice page.