What is “Fintech”?

“Fintech” refers to the application of software and hardware to financial products and services, making them faster and easier to use.  Familiar examples of Fintech used by consumers includes mobile banking and investment, payment processing, and direct lending (i.e. borrowing, through an online portal or application). 

How Does It Work?

The typical structure often includes a Fintech entity that generates the leads for the various products that a licensed bank wants to sell to consumers:

Consumer		Fintech		Licensed Lender
		Identification of consumers, preliminary Know Your Customer ((KYC), Office of Foreign Asset Control (OFAC) and suitability screening. Onboarding of eligible consumers at Fintech level. Creation of application programming interface  (“API”) through which the lender’s products are provided to the consumer. Provide ongoing servicing of lender’s products.		Conduct standard KYC and OFAC screening. Onboard eligible consumers as account holders. Determine whether API will be operated by the Fintech or by the licensed lender. Identify servicing obligations to be assigned to the Fintech.

Fintech Regulatory Landscape and Unraveling the Regulatory Maze

The overall regulatory landscape for Fintechs is currently evolving, with additional regulations applicable to Fintechs expected in the near future. While comprehensive regulations have not been proposed, Fintechs are already subject to direct federal regulation with respect to anti-money laundering, beneficial ownership, consumer regulations, data security and privacy, and compliance with the regulations issued by the Financial Crimes Enforcement Agency. Fintechs that partner with financial institutions may also be regulated pursuant to the Bank Service Company Act, which authorizes federal banking regulators to inspect and regulate material service providers (such as providers of data processing services, typical banking services, and payment processing services).

Indirect regulation has arisen as a consequence of the issuance by federal banking regulators of final Interagency Guidance on banking organizations’ management of risks associated with third-party relationships (the “Interagency Guidance”).  The Interagency Guidance clarifies the risk management practices that financial institutions must apply to all third party relationships, emphasizing the required involvement, approval and oversight of the bank’s board of directors.  This has prompted most financial institutions to require their service providers to adopt comparable risk management strategies which include direct involvement of the board of directors or comparable governing body.

Depending upon the Fintech’s products, federal regulation of securities and commodities may also impact a Fintech.  State-level banking, insurance, securities, real estate and consumer protection regulations may also apply.  

In future reports we will provide case studies which highlight the application of the current regulatory scheme to Fintechs, as well as the related due diligence and compliance obligations.