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Federal Reserve Publishes Paper on Community Bank Access to Innovation through Partnerships

The Federal Reserve Board (FRB) published a paper on September 9, 2021, describing the landscape of partnerships between community banks and fintech companies. The purpose of the FRB paper is to support responsible innovation in the community banking sector. The paper provides insights that the FRB gathered from discussion with community banks, fintechs, and other stakeholders focused on the strategic and tactical decisions that support effective partnerships. The FRB has stated that it supports responsible innovation that provides community banks access to new technologies, while ensuring safety and soundness of the institutions and protection of consumers.  In a 2020 speech, Federal Reserve Board member Michelle W. Bowman stated that “the successful integration of financial technology into the community bank business model is proving to be enormously valuable to enable community banks to enhance the services they’ve already proven they can deliver effectively. Under the right circumstances and with the appropriate guardrails, partnerships with fintechs can provide community banks with this access, enabling them to better serve their customers and deploy innovations that may be too costly to develop independently.

The paper provides an overview of the evolving landscape of community bank partnerships with fintechs, including the benefits and risks of different partnership types, and key considerations for engaging in such partnerships. The FRB notes that while these lessons may apply broadly to the community bank sector, each institution should evaluate how fintech partnerships fit into their own strategic objectives based on their research, risk profile, and third-party risk management practices.  The FRB has also stated that the paper does not establish new or interpret existing guidance related to third-party risk.