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Mar29 - 21

Fintechs: Get Banked with Great Documentation

Brandi B. Reynolds, CAMS-Audit, CCI

The Premise

You’ve watched the Fintech world blossom over the past decade and you realize it’s time to pursue an idea you’ve been developing over the years. Yes, you want to start a Fintech.

You have a solid business case for a solution that addresses a bona-fide financial need. You’ve included this business case in a fully developed business plan and flow of funds. You’ve developed an operating budget that supports your launch. You successfully line up some investors. You even have a technology provider lined up. Success? Now comes the hard part!

The Problem – Finding a Bank

In today’s Fintech environment, the difficult part is finding a “Fintech Friendly” bank that will bank your accounts.  Initially you will have two accounts – a regular business operating account and an account that will process your customers’ transactions.  Few banks in the U.S. will bank the second account, and because of this it can take a start-up Fintech months or even years to find a U.S. bank to bank them.  Banks that are seasoned in this space are extremely selective of the Fintechs they’ll take on, at times requiring a minimum opening deposit north of $5 million and on-boarding fees in the $25,000 to $50,000 range.

Your best option might be to find a bank that is entering the Fintech space and strike up a win/win partnership with them.  There will still be minimum deposits required along with onboarding fees (banks have to cover the risk they take on when banking any Fintech), but you can create a partnership where everyone learns as they go along.  Don’t rule this out.

Found the Bank – Next Problem

Whether you approach a seasoned Fintech bank or work with a bank that’s new to the Fintech space, you will likely be required to apply for an account.  To support your application. you will have to prepare your due diligence packet.  This packet will help the bank understand your business.  It will also support the bank’s risk management requirements because in the Fintech world, the bank is the de facto regulator for its Fintech customers.  You should budget several months to prepare all of the documentation that any bank will require when reviewing a prospective Fintech customer.

The due diligence packet plays the part of the application for a charter for a regulated financial institution without the heavy reliance on balance sheet and income statement projections.  It should demonstrate that you know the proposed business, especially its risks.  It will also demonstrate your thorough knowledge of the regulatory environment you propose to enter.

Preparing for Due Diligence

These 10 topics are likely to be on most banks’ due diligence checklists.

  • Ownership and Management structure (including your staffing plans).
  • Products and services and required licensing for them. If you’ve made it to the Due Diligence stage, then it’s likely that you’ve already pitched your product to the decision-makers and received the preliminary green light, but you’ll still want to document your products and services.
  • Licensing and Registration requirements. H Show that you have registered for or obtained all necessary registrations. Bureaucratic delay is a problem if a license depends on having an approval from another office or agency or, if it depends on being an operating business.
  • Governance and Risk Management Oversight. Prove that you are organized for success by showing a sound process for discovering and solving problems.
  • Systems/IT/InfoSec/Cyber. This is, perhaps, the largest section because of the tech part of Fintech! It’s also the area where many of the most important risks lie, contributing to the size of this section of the packet.
  • Consumer Regulatory Compliance. This portion is the alphabet soup of consumer laws and regulations.
  • BSA/AML/OFAC/Sanctions Compliance. (part of financial crime). This portion should include descriptions of training programs for staff, management, officers and directors. Don’t forget to train the Board of Directors.
  • Identity Management Program. This section relates to the IT and InfoSec portion but it’s sufficiently important to receive separate treatment. This subject also includes ID theft prevention.
  • Risk Management Program. This portion will serve as an assurance that you have an understanding of the risks ahead and how to mitigate them. Your bank will demand a sound program because it’s subject to the same demand from its regulators
  • Customer Privacy. This could be considered a subset of IT/InfoSec or of consumer compliance. With several highly publicized data breaches in recent years, it’s sensitive enough to regulators to be a separate topic for your due diligence package.

Each of the ten areas includes multiple sub-areas. Each will require multiple documents and many will require specific training of officers and staff.  Some areas will be more robust than others, depending upon the type of Fintech you are starting, and certain Fintech types (online business lenders, online consumer lenders, investment companies, cryptocurrency companies, payment processors, money services businesses, and gaming enterprises) will have an addendum for additional industry-specific documentation that’s required.  As with all areas of documentation, there is much overlap.

Resist the urge to download documentation from the internet because, it won’t take long for your bank to catch on to that.  The writing should be original, although paraphrasing is inevitable.  Most importantly, though, you want your documentation to be specific to your company to show your bank that:

  • You know your business
  •  You know your customers
  •  You know your risks
  •  You understand the regulations you must follow
  •  You can manage fraud and suspicious activity
  •  You’ve mastered the “tech” part of Fintech.

If you are still at a loss for where to start, let our team help!

Why Bates Group, LLC?

Your initial due diligence could mean the difference between getting banked and not getting banked so, you’ll want to put sufficient effort and resources into this endeavor.  If you’ve made it to the due diligence stage then you know the bank is interested.   You don’t want to provide the documentation to your bank piecemeal because your bank could lose interest and pursue other Fintech relationships.

We value our clients and strive to see start-ups succeed! Stay tuned for our Guide to Fintech Due Diligence Documentation that we will soon be publishing.  Follow-us on LinkedIn for more great resources.

For more information on how Bates Group can assist with your compliance needs, please contact us.




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