As banks continue to enter into partnerships with fintechs, the risks as well as the benefits of these arrangements are becoming clearer. The meltdown of FTX and Alameda Research is the latest example of what can go wrong when a less-regulated company is tied to the regulated financial industry, a topic that regulators like the Office of the Comptroller of the Currency have been sounding alarms about throughout the year.
Banks have been increasingly teaming up with financial technology companies to streamline processes like payments, underwriting and app development. Some banks offer banking-as-a-service to fintechs, letting the third parties take advantage of banks’ charters and deposit insurance while providing more nimble services to consumers.
Comptroller of the Currency Michael Hsu said in a September speech that bank-fintech partnerships can serve all parties involved, but folks need to think about several due diligence questions to avoid risk. He added deficiencies in risk management can be “devastating.”
“Much more work remains to be done. My sense is that we are still in the early stages of a significant shift in how banking services are going to be provided in the future,” Hsu said in September at The Clearing House and Bank Policy Institute’s Annual Conference. “By expanding our aperture, engaging more substantively with nonbank technology firms, and mapping out bank-fintech relationships and risks, we can help ensure that banking remains trusted and safe, sound, and fair as the system evolves.”
Here are some of the biggest risk factors of fintech-bank relationships:
