After a significant funding boom in fintech, the market has returned to something approaching historical norms. However, the company formation rate in the sector over the past few years means there are many businesses with many “necessary” add-ons you might be tempted to use. Certainly, some could add value, but how should you go about separating the good from the bad?

The trick is to know which questions to ask. While there is no “one-size-fits-all” question list, there are key attributes you should always look for.

Deep financial expertise

The unfortunate truth is that much of the fintech sector has “very little fin, and very little tech.”

Financial instruments are much more complex that the average person realises, but it would be a ridiculous requirement for everyone to have to become finance experts before using them. This complexity extends to what are commonly considered cash substitutes, such as Treasurys and money market funds (MMFs).

Instead, most opt to rely on the expertise of a fintech solution. If you're considering one that offers, competes, or deals with financial instruments, look for a senior team with real and tangible investing experience—a couple of years at a big bank making PowerPoint slides does not count. A decade or more of investing billions of dollars in a variety of situations creates a level of understanding and an industry network that informs a holistic view of the myriad of financial instruments available in markets. And most importantly, it forms the basis for understanding, pricing, and managing risk across asset classes.

Track record of building scalable technology

Coding or programming is much more commonplace than it was 20 years ago. As in other industries, title inflation is rampant, and everyone is now an “engineer”.

True engineering is not just knowing how to create a little app. It’s an understanding of algorithms, how to process data at scale, architecture choices, and many other areas, all of which need to be packaged into a solution that doesn’t hide complexity, but makes it easily manageable.

Building technology in the finance world means dealing with systems that are in some cases many decades old and don’t behave like modern technology does. It also requires a focus on robustness that is not typical for the technology sector.

Does the fintech’s senior team have a track record of delivering complex applications at scale? Have they worked in highly regulated, data-rich environments? Do they understand which parts of the sector can be scaled, and which cannot?

Well-documented compliance with anti-money laundering rules

In the United States, the Bank Secrecy Act (BSA) establishes program, record keeping, and reporting requirements for banks. The BSA is the primary regulatory source for know your client (KYC) and know your business (KYB) rules, as well as anti-money laundering (AML) requirements.

KYC and KYB are required to verify that the businesses on a fintech’s or bank’s platform are real and legal, and that the underlying owners are also real and legal. A good process does this by documenting the steps taken and weighing the evidence for or against having established true identities.

KYC and KYB are not exact processes, and requirements vary by region, regulator, and financial institution. Any fintech solution you work with should be aware of these requirements and well-documented explanations of how they're satisfying them.

The cost of dealing with fraud and lax security is very high both financially and operationally. Pick a fintech that has established a very high bar for processes and thresholds for allowing users onto their platform. Ask for numbers to substantiate this. And if their process seems too “frictionless,” question if you’re being adequately protected.

Respect for the regulatory environment

The FDIC, the Federal Reserve, the OCC, and the Treasury overall are the most visible regulators and agencies tasked with ensuring that banks and fintechs are adhering to the rules and regulations. There are many different aspects a fintech must be aware of, and engaging sensibly is key to thriving in the long run.

Look for fintechs that understand the importance of working with regulators and staying well away from grey zones. Those that push the envelope will likely face material fines or could be forced out of business, resulting in headaches for your business as you unwind your operations from them.

Ask probing questions regarding how the fintech ensures it is respecting regulatory boundaries and on top of regulatory changes. Who holds money? How does it move (money transmission)? What safeguards are in place? What are upcoming regulatory changes and how does the fintech plan on meeting new requirements?

Focus on security and safety

Think about this as security from a technology perspective, and safety from an overall product perspective.

On the technology side, that means a focus on systems and processes. Has the fintech undergone a third-party evaluation such as a SOC 2 Type 2, which includes a three-month audit. Make certain not to mistake this for a Type 1, which captures just a single point in time.

Is regular penetration testing and vulnerability scanning performed? Are principles like “secure by design” and “secure by default” the norm in their development process? Is multi-factor authentication (MFA) the default?

When it comes to safety, the topic is much broader. Whether in technology or financial instruments, company systems and processes, or suppliers and vendors (as well as customers), how focused is the fintech on constantly lowering risk and ensuring customer funds and information are safe? What are the processes in place for ensuring this?

At Mayfair, all of the above is in place, in addition to others. For instance, we also monitor the health of our banks using FDIC-reported metrics and our own in-house generated information (approximately 50 data points per bank, as of the date of publishing, with more being added regularly). We have an extensive vendor vetting and selection process. Our overall risk stance leads us to have a thorough KYC and KYB process, and to focus on providing returns that don’t come with opaque embedded risks.

Don’t take these topics for granted

There is a wide range of quality in the fintech universe. Just because big investors are attached to a name doesn’t necessarily mean the company operates at the highest level. This year alone featured numerous fines and actions for reputable names— Metropolitan Commercial Bank and Wise, to name just two— and the industry as a whole expects many more to come. Even qualitatively small infractions, like Wise’s, show the degree of compliance government agencies now expect—and that you should, too.

You can’t expect anyone to do all the work for you—that’s why you have to ask questions. If the answers don’t make sense, don’t be shy. Ask again. With enough practice, you’ll begin to see warning signs and gravitate towards fintechs that intend to be in the market for the long run, and who will act as highly capable partners to your business.

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