Blog Post Authors: Sarah Sargent & Andrew Spillane from Godfrey & Kahn
The benefits of start-up financial technology companies partnering with established market participants, such as banks, credit unions, and finance companies, are endless. Yet, the conservative and risk-averse nature of financial institutions and the agencies regulating them can hinder innovative partnerships with fintech. In contrast to a software developer’s typically more nimble approaches, a regulated financial institution’s project plan can be thorough, lengthy, and cautious:
when negotiating financial technology contracts and strategies to resolve them. Tackling each issue will help fintech and financial intuitions forge successful partnerships.
Clearly Define Expectations
This issue gets to the core issues of how the relationship will be conceptualized and implemented. The agreement should address issues such as:
Confidentiality and Information Security are Critical
When handling customer information, confidentiality and information security will be critical. Regulators have started emphasizing the value of the FFIEC cybersecurity assessment tool (“CAT”), with some examiners requiring their institutions to meet specified maturity levels. Even for digitally native fintech companies, these requirements can be highly perspective. With
the right negotiation approach, fintech companies can sell the institution on what protocols they currently have in place and the means by which the protocols are tested, and then the institution can make a risk-based decision regarding the security procedures to prioritize.
Determine Appropriate Ownership and Permissions around Intellectual Property
The parties will need to document the ownership and use of intellectual property. Typically, the fintech company owns the intellectual property and the institution has a limited license to use it. But, when fintech solutions are jointly developed, this discussion becomes more complicated. A fintech company, particularly a smaller, less diversified startup, will need to retain ownership or other rights in the intellectual property to ensure freedom to market the product to others. The institution, by contrast, will see resale of the jointly developed intellectual property as an opportunity for their competitors to benefit from their investment or, if the fintech retains ownership, an opportunity to prevent the institution from marketing a similar product to its customer after the contract ends. The parties may therefore negotiate exclusivity provisions with reasonable boundaries around time, geography, and scope and license provisions with specific permissions around use.
Negotiate Appropriate Risk Allocations
The parties will need to negotiate appropriate risk allocations. This can be done through warranties, limits on liability, and indemnification provisions. This is especially important when a fintech company is providing a product the institution then markets to its customers. Since the institution is ultimately responsible for the acts of its third party service providers in the eyes of the regulators, it will look to its service providers to share in the responsibility should issues arise. At the same time, liability exposure can result in revenue recognition issues or, worse, the potential for a single customer relationship to put the company’s long-term viability at risk. Well-drafted warranties, limits on liability provisions, and indemnification provisions can protect the fintech company, while providing protection to the financial institution for certain higher risk priorities, like intellectual property infringement, security breaches, and serious instances of misconduct.
Don’t Underestimate the “Check the Box” Provisions
Typically, institutions include routine, “check the box” issues under institutions’ vendor management policies that are not often controversial. These provisions often include language that the fintech company will comply with ongoing due diligence monitoring requests, submit to the oversight and information requests of an institution’s examiners, and in the case of banks
acting as federal contractors, equal opportunity clauses. These miscellaneous provisions are important from a regulatory perspective and should not be overlooked.
These issues, and more, will be discussed in-depth by Andrew Spillane and Sarah Sargent at their 2021 U.S. Fintech Symposium session titled, "How To Get To Yes: Managing Contract Negotiation in Fintech."
Blog Post Authors: