Solving the Fintech Vendor Due Diligence Conundrum

Solving the Fintech Vendor Due Diligence Conundrum

Banks are ultimately responsible for all of the services that they provide, even when they contract with third parties to help them deliver those services. More and smaller banks are partnering with outside providers, and there are more and smaller third parties being formed to meet more specific bank needs. While there’s even a section in the U.S. Federal Financial Institutions Examination Council’s (“FFIEC”) IT Examination HandBook detailing what sorts of due diligence a bank should conduct on its third party service provider, there’s still room for interpretation when deciding how more inexperienced banks should deal with those responsibilities.

The answer isn’t straightforward. All banks are challenged when contemplating a relationship with a small fintech because of the first three items on the FFIEC checklist: Existence and corporate history; Qualifications, backgrounds, and reputations of company principals…; and Other companies using similar services from the provider…. Small, new companies will find it more difficult than established firms to pass muster; many banks simply won’t want to take the risk of dealing with them. And many smaller banks simply won’t have the resources or expertise to properly vet these new entrants.

At the same time, many larger service providers to banks (including software vendors, outsourcing providers, and consulting shops) are searching for ways to bring innovation to their banking clients.

In recent conversations with clients I’ve been struck by an increasingly popular solution: a larger, more established firm bringing a fledgling company under its wing. The incumbent does the due diligence, offers advice, and, when satisfied, vouches for the FinTech. It may license the software, or engage the Fintech as a subcontractor; in any case, it’s assuming responsibility for the work of the smaller and newer firm.

Vendor Management Graphic

Executed properly, it’s a three way win: the bank accesses a new and innovative solution; the incumbent service provider is able to add new value to the relationship; and the fintech is able to begin a relationship from which it would otherwise have been shut out. All participants in the banking ecosystem should consider whether this solution can help their particular situation.

Dan Latimore About Dan Latimore

Daniel W. Latimore, CFA, is the Senior Vice President of Celent’s Banking practice and is based in the firm’s Boston office. With a wide range of experience in industry and as a consultant, he brings examples from outside financial services to help banks improve their customer relationships, with a particular emphasis on the importance of technology and culture.

Dan's coverage areas include the banking ecosystem, digital and omnichannel banking, and innovation. He has a passionate interest in behavioral economics and exploring why consumers and humans make the decisions they make, and what the implications are for banks.

Dan has been widely quoted in the press, including the Wall Street Journal, American Banker, Boston Globe, CNBC, and CNBC Europe. He is also a frequent speaker at industry conferences and client gatherings, having addressed audiences ranging from intimate meetings with CEOs and central banks to keynote conference speeches in more than a dozen countries.

Prior to Celent, Dan led research groups at Deloitte and IBM, worked in industry at Merrill Lynch (where he lived in New York, Tokyo and London) and Liberty Mutual, and was a consultant at McKinsey & Co.

Dan received a Masters in Public Administration from the John F. Kennedy School of Government at Harvard, and an undergraduate degree from Dartmouth College. He holds the Chartered Financial Analyst designation from the CFA institute.

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