Just two years ago, the financial services industry questioned whether fintech business models would be sustainable. Today, fintech revenue reports indicate that 74% of the largest 85 public fintechs are profitable, versus 68% in 2024, and fintech revenue is growing 22% year over year, four times faster than bank revenue. The majority of fintech revenues are derived from payments processing and lending services.
As financial institutions continue to explore partnerships with fintech companies — to accelerate innovation, improve customer experiences, expand product offerings, and increase operational efficiency — regulators continue to emphasize caution.
While many activities may be outsourced to fintech, accountability cannot be, and exercising due diligence is imperative for the financial institutions that partner with them.
These arrangements can introduce new strategic, operational, compliance, cybersecurity, and reputational risks. Boards play a critical role in ensuring management has established an effective framework to evaluate, oversee, and monitor fintech relationships throughout their lifecycle.
Why Fintech Partnerships Matter
The pace of technological change has created pressure for financial institutions to modernize services and meet evolving customer expectations. Fintech partnerships can provide access to specialized capabilities that may be difficult or costly to develop internally.
Potential benefits include:
- Enhanced customer experience and digital capabilities.
- Faster product development and deployment.
- Expanded market reach and new revenue opportunities.
- Improved operational efficiency and automation.
- Access to innovative technologies, including artificial intelligence and advanced analytics.
While these benefits can be compelling, institutions should carefully evaluate whether the partnership aligns with their strategic objectives, risk appetite, and operational capabilities.
Key Areas of Board Oversight in Fintech Partnerships
Strategic Alignment
Directors should understand how proposed partnerships support the institution’s long-term strategy and whether management has clearly defined success metrics.
Key considerations include:
- Does the partnership align with strategic priorities?
- What customer need or business objective is being addressed?
- How will success be measured?
- What are the financial implications and expected return on investment?
Risk Management and Governance
Fintech partnerships often create reliance on third parties for critical processes, data management, customer interactions, or technology infrastructure. Boards should understand how management evaluates and monitors these risks.
Areas of focus include:
- Third-party risk management processes.
- Vendor due diligence procedures.
- Ongoing performance monitoring.
- Incident escalation protocols.
- Business continuity and resiliency planning.
Regulatory Compliance
Ultimately, financial institutions remain responsible for compliance with applicable laws and regulations regardless of whether activities are performed by a fintech partner.
Boards should seek assurance that management has evaluated:
- Consumer protection requirements.
- Anti-money laundering and Bank Secrecy Act obligations.
- Fair lending considerations.
- Privacy and data protection requirements.
- Regulatory reporting responsibilities.
Data Security and Cybersecurity
Fintech arrangements often involve significant data sharing and technology integration. As cyber threats continue to evolve, directors should understand how sensitive customer and institutional information is protected.
Important considerations include:
- Information security controls.
- Data ownership and usage rights.
- Cybersecurity monitoring and reporting.
- Incident response responsibilities.
- Independent assurance reports and assessments
- Understanding where the data is housed and managed
Operational Resilience
Operational challenges at a fintech partner can quickly become challenges for the institution. Boards should evaluate management’s plans for maintaining continuity if a partner experiences service disruptions, financial distress, or operational failures.
Questions may include:
- How critical is the partner to business operations?
- Are contingency plans established and tested?
- Is there an exit strategy if the relationship must be terminated?
- How quickly could services be transitioned to another provider?
Financial Condition and Sustainability
Many fintech organizations operate in rapidly changing markets. Boards should understand management’s ongoing assessment of the partner’s financial strength and long-term viability.
Areas for discussion include:
- Financial stability and funding sources.
- Growth strategy and business model sustainability.
- Concentration risks.
- Dependence on key customers or investors.
Questions Boards Should Consider Asking
As part of regular oversight discussions, directors may consider the following questions:
Strategy and Business Case
- How does this partnership support our strategic objectives?
- What problem are we solving for customers or the institution?
- What are the expected benefits, costs, and risks?
Risk and Compliance
- Has management completed comprehensive due diligence?
- How does this arrangement align with our risk appetite?
- What compliance obligations remain with the institution?
Technology and Cybersecurity
- What customer or institutional data will be shared?
- How have cybersecurity controls been evaluated?
- What independent assurance reports have been reviewed?
Governance and Oversight
- How will performance be monitored and reported?
- What metrics will be provided to management and the board?
- What escalation procedures exist for significant issues?
Resilience and Exit Planning
- What happens if the fintech experiences operational difficulties?
- Do we have a documented and practical exit strategy?
- How frequently are contingency plans reviewed and tested?
Looking Ahead
Fintech partnerships are likely to remain an important component of many financial institutions’ growth and innovation strategies. Effective board oversight does not require directors to become technology experts; rather, it requires asking thoughtful questions, understanding the institution’s risk exposure, and ensuring management has established appropriate governance, monitoring, and accountability mechanisms.
By maintaining a balanced focus on both opportunity and risk, boards can help institutions pursue innovation while safeguarding customers, maintaining regulatory compliance, and protecting the institution’s long-term stability and reputation.
Are fintech partnerships becoming an important part of your financial institution’s strategic planning? Let’s talk about the risks and considerations for your institution. Contact Kristy Clark at 248-614-6446 or [email protected] or Liz Ziesmer at 616-975-2855 or [email protected].