Winning Financial Institutions’ Trust: A Fintech’s Guide to Risk Assessments

Today, financial institution prospects increasingly expect fintech partners to proactively provide attestation reports. Delivering these reports to potential clients promptly builds trust, overcomes objections, and establishes credibility early in the relationship. This approach not only accelerates the sales cycle but also lowers customer acquisition costs.

Additionally, it demonstrates preparedness in light of recent negative industry headlines. As highlighted in a recent ABA Banking Journal article, federal regulators are raising expectations for bank boards to enhance oversight of fintech partnerships, as shown by recent enforcement actions.

Navigating the Regulatory Landscape

Conducting thorough due diligence on fintech partners is not just a best practice for financial institutions – it’s a regulatory requirement outlined by agencies like the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Federal Reserve, Federal Financial Institutions Examination Council (FFIEC), National Credit Union Administration (NCUA), and Consumer Financial Protection Bureau (CFPB).

A recent joint agency Community Bank Guide highlights six key areas for financial institutions to focus on during fintech due diligence: business experience and qualifications, financial condition, legal and regulatory compliance, risk management and controls, information security, and operational resilience. The level of due diligence required varies based on the criticality of the fintech partnership, and familiarity with the standard attestation reports is key to selecting the right service for your company.

Building Trust With Attestation Reports

Financial Statement Audit

A financial statement audit provides an independent third-party verification of a company’s financial health and stability. It examines an entity’s financial statements and related disclosures in accordance with generally accepted auditing standards (GAAS). The audit’s primary goal is to provide an opinion on whether the financial statements fairly present the company’s financial position in accordance with generally accepted accounting principles (GAAP).

Through this process, the auditor obtains reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error, and issues an audit opinion. For financial institutions, showcasing fiscal responsibility and transparency is essential for building trust and demonstrating stability to customers.

Service Organization Control (SOC) Reports

A SOC 1 report audits a service organization’s internal controls relevant to their client’s financial reporting, focusing on controls that affect the accuracy and integrity of financial statements. In contrast, a SOC 2 report assesses non-financial reporting controls related to security, availability, processing integrity, confidentiality, and privacy.

SOC 2 reports are particularly significant for technology providers, offering detailed insights into how an organization manages and secures data. Financial institutions often rely on SOC 2 reports to assess and select vendors, especially those handling sensitive information. Given the data-intensive nature of fintechs, financial institutions typically prioritize obtaining a SOC 2 report from their fintech partners.

Anti-Money Laundering (AML) & Know Your Customer (KYC) Compliance

Fintechs must comply with AML and KYC regulations to maintain compliance with local, federal, and global standards. Key procedures for compliance include customer identification, ongoing monitoring, risk-based assessments, and screening against various lists. Fintech companies face challenges such as balancing seamless user onboarding with AML requirements, adhering to strict regulatory standards to avoid sanctions, and detecting fraudsters effectively.

Compliance is essential for preventing financial crimes and mitigating regulatory penalties. Financial institutions prioritize strong AML and KYC practices among fintech partners to safeguard their operations, protect customers, and uphold their reputations, all while navigating regulatory demands and driving innovation in financial services.

Payment Card Industry Data Security Standard (PCI DSS)

A payments-focused fintech requires a PCI DSS report to meet regulatory requirements for handling credit card information. This report highlights the fintech’s dedication to safeguarding sensitive cardholder data, fostering trust with customers and partners.

Achieving PCI DSS compliance reduces the risk of data breaches, avoids penalties, and offers a competitive edge in the fintech market. Additionally, it supports growth by meeting financial institution partners’ security expectations and driving ongoing improvements to the company’s security practices.

Preparing for Your Attestation Audit

After assessing what your potential financial institution partners require, the next step is evaluating your readiness for the applicable audit. Depending on your organization’s maturity and internal expertise, you may need external support to ensure your documentation meets audit standards.

To streamline the audit process, consider these steps:

• Request the auditor’s list of requirements early and seek clarification as needed.
• Document your internal processes and controls in advance.
• Schedule a meeting with your auditors before their work begins to discuss first-time nuances, new business activities, etc.

Maintaining clear and open communication throughout the process can minimize surprises at the completion phase and contribute to a smoother, more successful audit.

How Can Wolf’s Fintech Team Support You?

In today’s evolving regulatory and financial landscape, proactively addressing financial institution expectations is critical for fintech companies. Attestation reports such as SOC, PCI DSS, and AML/KYC compliance not only build trust and credibility but also meet the stringent due diligence requirements set by regulators. Preparing for these audits through meticulous documentation, effective communication, and expert support can streamline the process and position your company as a reliable and secure partner.

Wolf’s Fintech team is equipped to guide you through these challenges, offering tailored solutions to help your organization meet regulatory expectations and achieve success. Whether you know what attestation services your fintech needs or want guidance in determining what your situation requires, Wolf is here to assist you.