Fintech companies often join forces with financial institutions to strategically expand their products and services. Such collaborations can bring innovation opportunities to traditional finance, but they are not without risks. The author of this article, Luvleen Sidhu, co-founder, president, and chief strategy officer of BankMobile, draws on her own experience to raise three key questions that help financial institutions assess the fit of potential fintech partners.

In a study called "What's Going on in Banking," 53% of C-level executives at mid-sized banks and credit unions believe that fintech partnerships will become important in 2019. Thanks to advances in machine learning, artificial intelligence, and cloud computing, banks can gain the support they need to improve their product portfolios while creating frictionless experiences for customers. Although such partnerships are often reasonable, they are not flawless. Problems can arise from failure to properly comply with financial regulations, and some regulations have not yet covered rapidly evolving technology areas.

Take BankMobile as an example: the company successfully partnered with Upstart to offer personal loans. Upstart focuses on using artificial intelligence and machine learning to predict borrower creditworthiness, an approach that has become an industry game-changer. BankMobile was able to offer new services to existing customers, helping them save money and get out of debt faster. More than two-thirds of loans originated through Upstart are fully automated and approved in real time. The partnership with Upstart has generated positive customer feedback, and the product's net promoter score (NPS) is currently 82.

To determine whether a potential fintech company is a good fit for your institution, you can start with the following three questions:

Question one: Does the fintech partner maintain good relationships with regulators?

In the United States, fintech companies must comply with federal and state laws. Some regulators support technology companies in simplifying laws to enable rapid innovation, but the rapid rise of startups and fintech means that regulators sometimes need to catch up to cover these innovations in detail.

Partnering with fintech means developing an appropriate plan to address existing and potential regulatory hurdles. Finding a partner with strong relationships with relevant regulators is crucial. Ask the partner what infrastructure they have in place to comply with rules. When navigating the regulatory landscape, the following questions should be considered:

  • Are there existing regulations applicable to the fintech's specific product or service?
  • Do they need specific licenses? If so, do they already have them?

However, do not shift all responsibility to the partner. Banks have a regulatory obligation to establish vendor management programs to oversee fintech partners. Be sure to hire personnel familiar with the rules and best practices, or designate team members to liaise with relevant regulatory contacts. As the industry evolves, it is crucial for fintech partners to keep up with the latest regulatory practices.

Question two: Does the fintech partner have mature anti-fraud methods, especially for new online account openings and identity verification?

According to the "Global Identity and Fraud Report" published by credit reporting agency Experian, 55% of businesses reported an increase in fraud-related losses over the past year, with specific losses coming from account opening and account takeover attacks.

Staying vigilant against cyberattacks is crucial. Understand what measures the partner has taken to address fraud and how they protect customer safety. Ask the partner what investments or infrastructure they use to respond quickly and effectively to fraud issues. Advances in artificial intelligence and machine learning help identify potential fraud risks. By considering multiple aspects of an individual together, it is easier to weed out bad actors. For example, factors such as how long an email address has been in use, combined with other data points, can help assess the fraud risk of a potential new customer. Highly multidimensional models are harder to breach than linear rule-based models.

Modern security measures can better verify genuine customers without slowing down the process. Today, customers expect a seamless and fast digital experience when signing up for new financial products and services.

Question three: What is the long-term sustainability of the fintech business?

Fintech companies need a clear vision of the problem they are trying to solve, but that vision must be supported by a clear business plan for sustained growth to be sustainable.

Investigate the following details to assess long-term sustainability:

  • Five-year revenue and funding roadmap.
  • Market demand for the product or service.
  • Strategy for scaling and continuously testing and iterating.
  • Plan for addressing regulatory hurdles.
  • Performance compared with competitors.
  • Market opportunity and how it may change in the future.

Conclusion

Partnering with fintech can help you serve your customers best. Whether through integration, plug-and-play, or other financial planning mechanisms, banks can bring the modern digital customer experience to the forefront. Asking these questions early in the screening process helps ensure a successful partnership and long-term sustainability.