As if the life wasn’t hard enough for fintech startups.
The Office of the Comptroller of the Currency published an FAQ section on its website this week, in order to clarify several points from its “Third-Party Relationships: Risk Management Guidance” issued in 2013.
As expected, the questions also addressed bank-fintech partnerships. Most notably, the OCC advised banks to be cautious when pursuing collaboration with early-stage fintechs, and consider the “financial condition” of the startup before sealing the deal.
In assessing the financial condition of a start-up or less established fintech company, the bank may consider a company’s access to funds, its funding sources, earnings, net cash flow, expected growth, projected borrowing capacity, and other factors that may affect the third party’s overall financial stability. Assessing changes to the financial condition of third parties is an expectation of the ongoing monitoring stage of the life cycle.
The agency notes, however, that “third-party service providers,” including fintech startups, do not need to meet a bank’s credit underwriting guidelines to enter into a partnership. From the FAQ:
OCC Bulletin 2013-29 states that depending on the significance of the third-party relationship, a bank’s analysis of a third party’s financial condition may be as comprehensive as if the bank were extending credit to the third-party service provider. This statement may have been misunderstood as meaning a bank may not enter into relationships with third parties that do not meet the bank’s lending criteria. There is no such requirement or expectation in OCC Bulletin 2013-29.
The FAQ also addressed whether a “fintech company arrangement” is considered critical activity for a bank, as well as some of the ways bank-fintech partnerships can help serve underbanked populations.
OCC has previously expressed its intent to be more up with times on tech developments in financial services, including its decision to grant banking licenses to qualifying fintechs (and thus regulating them).
However, the published FAQ doesn’t seem to offer much guidance to banks seeking partnerships, aside from stating the obvious — do your research — and discouraging banks from exploring early-stage opportunities (the kind that, if done right, may provide that critical competitive advantage).
In fact, the number of publicly announced substantial partnerships in the industry is not getting any bigger, as banks take their time with long project cycles. Even launching a POC can take painstakingly long, part of the reason being an asymmetry of information between the two parties.
“There’s an ambiguity in what banks on one side, and fintech companies on the other expect from a POC,” Bruce Wallace, CTO of Silicon Valley Bank, told Bank Innovation previously. “Fintech companies expect the bank will be an enterprise client, while for the banks it’s often more around R&D, product learning, testing. Talk to companies about how frequently they do POCs that never end up with an enterprise license.”
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