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The long and winning road: From FinTech diligence to partner confidence

Financial services organizations are used to increased regulatory requirements for FinTech and other vendors—so accustomed, in fact, that the established due diligence review process to assesses a vendor’s capabilities now reads like a regulation laundry list. It includes, but is not limited to:

  • Financial statement analysis
  • Management review
  • Risk management assessment
  • Funding
  • Insurance
  • Internal and external audits
  • Process flow diagrams
  • Compliance and privacy procedures

The checklist goes on—and seems to get longer and more complicated every day. But given the nature of FinTech relationships, even these more rigorous due diligence processes aren’t enough. And in some cases, the undotted i’s and uncrossed t’s put management and customers at risk.

Why is evaluating a FinTech different from other vendors? Let’s start with timeline: Many FinTechs startups have short operating histories and thus lack any track record for long-term sustainability. They also provide highly sensitive customer-touching activities such as origination platforms, analytics or “second-look” lending. Inappropriate actions on their part can damage reputations. Or worse.

At the same time, FIs often struggle to reach consensus on their internal priorities when they look at consumer or business banking FinTech partners. One ideal path might lead to an extensive “integrated” solution with the FinTech as a broad-based lending partner. Yet more FIs want help resolving discrete, near-term pain points: a “less pain over more gain” agenda, so to speak.

Caution often enters the picture as well.  For example, one FinTech began talks with a bank with the proposed goal of an integrated lending approach: an end-to end solution of streamlined loan processing, marketing and risk analytics and second-look lending among other features. Instead, the bank requested a digitized loan-documentation collection process. Both parties hope that this initial software can serve as first step to a more extensive relationship.

But will it?

Truth is, FinTech relationships may take years to develop—and in that time, the FI’s needs and the FinTech’s capabilities will likely change dramatically. Therefore, traditional vendor due diligence must change. FIs need to view it as a dynamic, three-stage process that goes beyond CYA (defined thus by Wikipedia) and addressing regulatory paranoia. Instead, the focus must shift to resolving internal management, culture and business issues on the way to success and solid FinTech partnerships.

FinTechs require dynamic due diligence for successful partnering

FinTechs require dynamic due diligence for successful partnering


The three phases of winning FinTech relationships

Phase One: Goals, selection and vetting begins with the FI reaching initial agreement on what it wants the FinTech to provide. That alone can mark a major accomplishment since it often requires line of business, product specialists, IT, compliance and legal to get involved, among others. As those voices may compete or even clash, FIs may lean towards a near-term focus and incremental change (as per the documentation collection process above). Yet this risks missing out on the more substantial solution FinTechs are eager to provide—and that will benefit many FIs.

Phase One includes completing a standard due diligence checklist, but also requires additional steps. Senior management should understand and support the FinTech’s current and anticipated role. Without that, the venture is likely to fail. What’s more, many if not most FinTechs will change owners, exit or simply disappear within three to five years. FIs must understand the potential impact for themselves and their customers.

Thus while agreeing upfront on a longer-term FinTech game plan makes strategic sense, FIs may find it unrealistic and thus choose to revisit their goals as part of Phase Three.

Phase Two: Implementation centers on putting the FinTech agreement into action. FIs need to create a detailed plan that summarizes the roles and responsibilities of various parties (within the FI and Fintech) and sets time frames for task completion. This is also the time to set key performance metrics.

Despite all the work required to select and introduce a partner, many FIs fail to leverage the capabilities the best FinTechs can provide:

  • Some FIs, particularly in business lending, allow their bankers to opt into the use of a digital platform. Yet this undercuts the opportunity to reduce operating expenses and position the FI as a digital leader. FIs need to set and enforce internal policies for effective adoption.
  • After they select and implement a digital platform or more integrated relationship, many FIs follow a “build it and they will come” marketing and sales approach to their digital offer—and fail to change for the digital environment. Beyond training and management oversight, they also need to adjust compensation, as this encourages bankers to lead customers to this new channel. Vendors report that some partners see little to no volume lift from their investment; others see dramatic improvements. What explains this? As they strive to manage digital transition and build volume, successful FIs exploit the intelligence FinTechs provide.

One bank working with a FinTech took more than a year to get its implementation process on the right track. The initial roadmap also needs a feedback loop that allows FIs to adapt their approach in light of internal issues and customer experience.

Phase Three: Execution, retrofitting, and reselection

collectively demand continued focus on executing the vendor relationship successfully. Narrow software improvements can stick relatively easily—but not so with a more integrated FI/FinTech offer. Each vendor has to hold up their end to set the course for a long-term relationship. Also, FI employees put their reputations on the line when they bring in outside players over the internal IT team.

But given a sound start, most FIs will expand their reliance on these vendors. The bank that begins with document capture may move ahead with a digital application, either online or branch-based. Similarly, the credit union that initially signs up for a loan origination platform may broaden their FinTech wish list to marketing, risk analytics, lead generation or loan funding.

To that end, today’s FinTech partner may not necessarily be the best. Once the FI agrees on its next initiative, the first question must be: Can the current vendor deliver? It’s the right time to revisit a Phase One-type process to evaluate other players: Due diligence must be ongoing rather than a one-time affair. Changing vendors can mean headaches and struggle. But if a new player can fill both current and new requirements, the potential wins are worth considering.

Parting shot: Diligence that delivers

Dynamic due diligence protects FIs and their customers. It creates a climate where banks and credit unions constantly evaluate how best to team up with vendors and capture the value FinTechs offer. That in turn boosts positive impact on FI revenues and bottom line.

Yet FI/FinTech partnerships are only in the early stages of a long and more complex journey. Many FinTechs are untested. Many banks remain uncertain. But building an enhanced due diligence process now better positions an FI to tackle their business requirements. Those may be unending. But the longer term opportunities are endless.


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The president of Financial Institutions Consulting (FIC), Charles Wendel has extensive experience as a banker and consultant. He is a regular contributor to American Banker and other financial services periodicals and a veteran commentator for BAI. He can be reached at [email protected].