Fintech acquisitions combine software due diligence with financial services complexity. The stakes are higher—regulatory exposure, money movement risk, and customer trust create unique assessment requirements.
What's Different About Fintech Diligence
Standard technical due diligence applies, but fintech adds layers:
- Regulatory complexity: Multiple overlapping regulatory frameworks
- Security intensity: Higher bar for security controls around financial data
- Availability requirements: Downtime = money and trust impact
- Audit requirements: Extensive record-keeping and audit trail needs
- Partner dependencies: Banks, payment networks, data providers
Regulatory Compliance Assessment
Applicable Regulations
Depending on the business model:
- Money transmission: State licenses, FinCEN registration
- Banking: OCC, FDIC, state banking regulators
- Securities: SEC, FINRA, state securities
- Lending: State lending licenses, CFPB oversight
- Privacy: GLBA, state privacy laws
Key Assessment Areas
- License inventory and compliance status
- Regulatory examination history
- Compliance management system maturity
- Regulatory change management process
Security Deep Dive
Fintech security assessment must go beyond standard:
Data Protection
- Encryption of financial data at rest and in transit
- Tokenization of sensitive payment data
- Key management practices
- Data retention and deletion policies
Access Controls
- Privileged access management for financial systems
- Segregation of duties in money movement
- Authentication strength (MFA everywhere)
- Access review and recertification
Fraud Prevention
- Transaction monitoring capabilities
- Fraud detection models and effectiveness
- Manual review processes and capacity
- Chargeback and dispute management
Incident Response
- Financial crime response procedures
- Regulatory notification requirements
- Customer communication protocols
- Recovery and remediation capabilities
Partner and Dependency Assessment
Fintech relies on critical partners:
Banking Partners
- Sponsor bank relationships and contracts
- Bank's due diligence on the fintech
- Contract terms and termination provisions
- Bank's regulatory standing and stability
Payment Networks
- Network certifications and compliance
- Processing agreements and economics
- Network rule compliance
Data Providers
- Credit bureaus, identity verification, account linking
- Contract terms and data access rights
- Redundancy and backup providers
Scalability and Reliability
Financial services have heightened availability requirements:
Availability Assessment
- Historical uptime and incident review
- Architecture for high availability
- Disaster recovery and business continuity
- Recovery time and recovery point objectives
Scale Capacity
- Can the system handle growth projections?
- How does the system perform under load?
- What's the cost curve as volume increases?
Case Study: The Bank Sponsor Problem
A payments company was acquired for $50M. Standard technical due diligence was completed. Post-close, a critical issue emerged.
The sponsor bank—essential for the company's ability to operate—was under regulatory scrutiny. Within 6 months, the bank terminated fintech partnerships to reduce risk exposure.
Impact:
- 90-day scramble to find new bank sponsor
- 3 months of limited operations during transition
- $2M in additional compliance costs for new bank's requirements
- $5M customer revenue lost during transition
The issue could have been identified: bank's regulatory issues were public, and contract termination provisions made the risk clear. A fintech-specific due diligence lens would have surfaced this.