Fintech risk has become an increasingly important consideration as banks and technology companies form partnerships to deliver faster, more convenient financial services. Fintech solutions have helped financial institutions modernize everything from account opening and mobile banking to B2B payments and contactless transactions, but greater reliance on outside technology providers can also introduce new operational and regulatory challenges.
As these relationships become more interconnected, regulators are examining whether the complexity of the fintech ecosystem could make risks more difficult to identify and manage. Concerns surrounding cybersecurity, operational resilience, consumer protection, and the financial stability of technology providers could become especially significant as economic conditions put additional pressure on fintech companies.
In recent years, there has been a growing demand for financial technology and solutions. Financial institutions have been quick to adopt new technologies to meet the needs of their customers. In particular, products and services have been used to streamline the process of opening and closing accounts, transferring funds, and making payments, including B2B payments. Fintech has also been used to develop new products, such as mobile banking apps and contactless payment methods. However, there are also some potential drawbacks to consider. One of the biggest concerns is that fintech solutions are often untested and unproven. This can lead to reliability issues, as well as security concerns.
Michael Hsu, Acting Comptroller of the Currency, has sounded an alarm over the increased role of fintechs that are not well funded and have greatly increased complexity (he calls it de-integration), and increased complexity also increases the risks associated with reliability and security.
Financially, rising interest rates and inflation, combined with decreased consumer spending may negatively impact fintech financing and revenue; which could speed up the fintech slide that has already been reported:
“Banks and tech firms, in an effort to provide a seamless customer experience, are teaming up in ways that make it more difficult for regulators to distinguish between where the bank stops and where the tech firm starts, said Hsu. And with fintech valuations falling as financing costs rise, bank partnerships with fintechs are increasing, he said.
That could create IT risks around information security and resilience, and also raises customer protection issues, said Hsu.
“I worry increasingly about the ‘unknowns’ and am concerned that the less familiar risks of this digital transition are unlabeled and thus unseen. As we learned from the 2008 financial crisis, risks that are unseen have a tendency to grow and later to be the source of nasty surprises,” said Hsu.
Earlier, Gene Ludwig, a former Comptroller of the Currency, also warned that regulations for fintechs are much less strict than those that govern banks.
“The non-banking industry is getting away with murder,” said Ludwig, who is now a managing partner of Canapi Ventures, a venture capital firm.
Ludwig predicted non-banks “will get us into the next financial crisis if we don’t do something about it.””
We have another article on the fintech ecommerce revolution. It takes a look at the biggest trends and how it is influencing eCommerce, including BNPL, payment options, SMS payments, data-driven marketing and sales, democratizing access to sales, social media commercem and other trends.
The continued expansion of financial technology demonstrates the value fintech companies can bring to banks, businesses, and consumers. New payment options, digital banking tools, e-commerce solutions, and automated financial services can improve efficiency and create experiences that traditional banking infrastructure may struggle to deliver on its own.
However, increased dependence on interconnected banks and technology providers also means fintech risk must be considered throughout these relationships. When multiple companies participate in delivering a financial product, responsibility for technology, security, compliance, and customer protection can become more complicated. A disruption or failure at one provider could potentially affect other organizations and their customers.
Economic pressures add another dimension to these concerns. Rising financing costs and declining valuations could make some fintech companies more vulnerable, particularly those that depend heavily on outside funding. Financial institutions partnering with these companies therefore need to consider both the technological capabilities and financial resilience of their providers.
None of these challenges diminish fintech’s potential to transform financial services. Instead, they highlight the importance of strong oversight as adoption expands. Banks and regulators will need to understand how increasingly complex partnerships operate, where responsibilities reside, and how risks are managed. Addressing fintech risk alongside innovation can help financial institutions capture the benefits of new technology without creating vulnerabilities that undermine reliability, security, or consumer confidence.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group.
