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Federal Reserve Issues Guidance on Community Bank Relationships with Fintech

  • Federal Reserve issues a guide for how community banks can evaluate potential partnerships with fintech companies
  • Banks have been forming relationships with fintech as a way of improving their services and reducing costs
  • Fed recommends evaluations of business qualifications, financial condition, information security, and more

Summary by Dirk Langeveld

The Federal Reserve has issued a guide intended to help community banks conduct due diligence when forming relationships with financial technology companies.

Fintech incorporates algorithms, software, and other technological solutions into financial management to help businesses and individuals with the automation and management of these processes. Community banks have started to enter business arrangements with these companies to improve their own efficiency, cut internal costs, and offer improved products and services to customers.

The Fed says any community banks looking to form such a partnership should evaluate a fintech company when forming a third-party relationship. The guide outlines detailed considerations as well as potential sources of information in six key areas:

  • Business experience and qualifications: Evaluating whether the company’s mission, experience, and services align with what the bank is hoping to accomplish
  • Financial condition: Determining if the company will be able to sustain its business operations and fulfill its obligations to the bank’s customers
  • Legal and regulatory compliance: Verifying a company’s ability to operate within the law and abide by regulations, especially in areas like privacy, consumer protection, fair lending, and anti-money-laundering
  • Risk management and controls: Assessing the company’s ability to conduct activities in a safe, sound manner consistent with the bank’s own risk appetite
  • Information security: Ensuring that the company will be able to handle and protect sensitive customer information
  • Operational resilience: Determining if the company’s operations are sustainable during disruptions, including an evaluation of its business continuity and disaster response plans as well as how reliant the company is on subcontractors

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