October 22, 2022 / VOLUME NO. 232

A Regulator Calls Out Technology Risk

The explosion of fintech partnerships is changing banking — and the risk profile of banks — “in profound ways,” warned Acting Comptroller of the Currency Michael Hsu in a recent speech.

Fintechs are creating “an increasingly varied and complex set of arrangements” with banks that are “significantly more intricate” than past outsourcing arrangements, said Hsu in prepared remarks for the Sept. 7 speech. These partnerships, which include digital banking, deposit and loan products, or business lines like embedded banking or banking as a service (BaaS), are creating a new and complicated risk landscape for banks to navigate and manage.

Hsu said that while bank information technology examinations have taken place for decades, “BIT concerns in the national banking system are elevated.” Bank information technology concerns make up 25% of all cited supervisory concerns, he said. A majority of them relate to what he called “fundamental elements of risk management,” such as board oversight, governance and internal controls.

“Technological advances can offer greater efficiencies to banks and their customers,” he said. “The benefit of those efficiencies, however, are lost if a bank does not have an effective risk management framework, and the effect of substantial deficiencies can be devastating.”

To that end, bankers exploring new innovative arrangements with fintech partners should address a host of questions around contingency planning and worst-case scenarios, he said in the speech. He outlined some questions boards and bankers should ask:

“Who is responsible for what when things break? How might confidence be lost in a banking services supply chain disruption and what would it take to regain it? How do banks and their third parties view and treat customers in bank-fintech arrangements — when do customers go from being the client to becoming the product and how are consumer protections maintained? How resilient are banking services to stress at fintechs? What happens when fintechs fail? How are bank and fintech business models changing and how are incompatibilities reconciled?”

These questions seem like a prudent thought exercise for boards and management teams as they explore how they can leverage technology to bring in more customers and revenue while appropriately managing the risk associated with these newer companies. At the very least, they may expect their examiner to ask them.

• Kiah Lau Haslett, managing editor of Bank Director

A version of this piece appeared in the recently released fourth quarter 2022 issue of Bank Director magazine. Read the rest of the magazine here or learn more about subscribing here.

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