Overview
Action Items
Before entering into any FinTech agreements, your bank should consider the following:
- The relationship with the FinTech
- Your own bank’s FinTech goals and strategy
- FinTech related laws and regulations
- Contact us to review and help develop any new, modified, or expanded bank products or services to ensure they are compliant
Recently, Barack Ferrazzano Financial Institutions Group partner Stanley F. Orszula participated in a roundtable in Washington, D.C. with banks, FinTechs, regulators, and FinTech thought leaders and scholars that focused on FinTech regulatory and compliance issues, especially with bank agreements. The critical emerging issues discussed that could potentially affect banks were:
- Unsupervised machine learning and artificial intelligence credit scoring models ("AI Credit Models"); and
- Third party vendor risk management.
The latter topic has previously been addressed by the Financial Institutions Group here:
AI Credit Models
Many FinTechs use proprietary AI Credit Models instead of FICO scores in their lending models. Unsupervised (by humans) AI Credit Models can result in the FinTech platform discriminating against legal sensitive characteristics, which could potentially violate the Equal Credit Opportunity Act ("ECOA") and Regulation B ("Reg B"). The problem is FinTechs keep their underlying AI Credit Models highly confidential and will not share this information with their bank partners. Accordingly, a bank could inadvertently violate the ECOA and Reg B through a FinTech platform that has an opaque AI Credit Model. Consistent with our prior discussions on this topic, banks need to review this issue critically.
Third Party Vendor Risk Management
Third party vendor risk management is also a critical emerging issue we previously highlighted. Vendor management is an especially critical area in FinTech because most banks will choose to work with a FinTech entity that owns, develops, and services the technology. The disconnect is many of these FinTech entities have little bank regulatory experience and may be learning as they develop and deploy their products without the legacy regulatory experience. They may also propose contract terms that expose banks to unnecessary risks. Banks can protect themselves by performing critical review in all stages of vendor management process, but especially with experienced legal counsel reviewing the underlying agreement.
We Can Help You
Please contact us if you are considering a new FinTech product or relationship or if you want to discuss how to approach contract negotiation with a FinTech in light of these issues.
References
- Client Alert: Working with a FinTech? – 5 Things to Know
- Client Alert: Updated Regulatory Risk Management Guidance
- FinTech Opportunities for Your Bank: A Voyage Into New, But Not Uncharted Waters
- Client Alert Update: FinTech & Bank Partnerships
