In an age of spectacular power of AI and machine learning models that seem to grow in capability year after year, fintechs are seeking ways to increase efficiency with these new tools. However, these tools are designed to literally have a mind of their own. So they can easily misbehave.

Take the example of Hello Digit LLC. Back in 2021 they launched a product that would figure out when the best time to make a transfer to savings would be. Crucially, they guaranteed to their customers that with their bot watching over their account the transfer to savings would happen at the best possible time and they would never get an overdraft fee.

The algorithm was supposed to be able to tell when the best time to make the transfer was. We can guess what comes next. The algorithm didn’t work correctly. Hello Digit’s customers were getting over draft fees left, right, and center as the algorithm misbehaved. The problem was so bad that Hello Digit ran afoul of the CFPB. The CFPB fined Hello Digit $2.7 million.

A costly mistake. An avoidable mistake.

It is no secret that fintech companies use models. Lots of models. They use models to evaluate credit risks, time decisions like when to make a transfer, mitigate fraud, price their products, and they may even use models to inform their economics. Fintech companies love their models.

So how do you ensure that your models won’t misbehave? Independent Model Validation! Model validation is the key to ensuring that models are working as expected. However, model validation is often seen as checking a box usually for regulatory purposes.

Smart fintechs know and understand that an independent model validation is a strategic tool that helps them grow. It is a strategic necessity.

Strategic Independent Model Validation

There are lots of benefits that come from conducting a thorough and independent review of your models. A smart fintech will come to see that independently reviewing models is a strategic decision that can improve profitability, increase investor and partner confidence, and increase speed to market with new products and services. Here’s how:

• Improve Profitability

A good validation can increase revenue. If a validator does a good job they will offer you recommendations on improving and enhancing your models. These recommendations can lead to stronger model performance, which will allow the fintech to build stronger portfolios of customers thus increasing their revenue as the strength of their portfolio increases. Allowing the fintech to lend with confidence.

The next benefit is that it can reduce costs. A validated model is more robust and less prone to errors or “drift.” This means a company spends less time and fewer resources on manual overrides, emergency fixes, and constant monitoring. By identifying and correcting data quality issues early, validation also ensures the entire data pipeline is more efficient. Thus reducing operational costs.

It lowers the cost of capital for the fintech. When a fintech can demonstrate to investors and financial partners that its core risk models are independently validated and sound, it becomes a more attractive and less risky investment. This can lead to better terms on funding rounds, lower interest rates on credit lines, and more favorable partnership agreements, all of which reduce the cost of capital.

• Increase Investor and Partner Confidence

Independent model validation increases your partner’s concerns about transparency. Many fintech models, particularly those using AI and machine learning, are perceived as “black boxes.” Investors and partners are wary of relying on technology they can’t fully understand or audit. Independent validation provides a transparent, third-party assessment of the model’s logic, data inputs, and performance, demystifying the technology and building confidence.

Model risk is a major concern for anyone providing capital or entering a business relationship with a fintech. A flawed model can lead to significant financial losses, reputational damage, and regulatory penalties. Independent validation identifies potential weaknesses and quantifies the risks associated with a model’s limitations, allowing investors and partners to make more informed decisions. It’s proof that the company is proactively managing its most critical risks.

Startups are often focused on rapid growth at the expense of robust governance. A fintech that invests in independent model validation shows that it is a mature, well-governed organization. This signals to investors and partners that the company is not just a great idea but a reliable business with a clear risk management framework.

Traditional financial institutions (banks, credit unions) are under immense regulatory pressure to ensure their partners meet strict compliance standards. Partnering with a fintech that lacks a formal validation process puts the institution at risk of regulatory penalties. By having its models independently validated, a fintech can demonstrate its commitment to compliance with regulations like SR 11-7 and others, making it a much more attractive and less risky partner.

Independent validation creates a comprehensive audit trail of the model’s development, testing, and performance. This documentation is invaluable during due diligence, audits, and regulatory examinations. It proves that the fintech has a structured, repeatable process for ensuring its models are fair, accurate, and compliant. This level of transparency is exactly what institutional partners and investors look for.

During a funding round or a partnership negotiation, a fintech will be subjected to intense due diligence. Having a portfolio of independently validated models gives the fintech a significant advantage. It allows them to quickly and confidently answer questions about the accuracy of their credit scoring, the effectiveness of their fraud detection, or the fairness of their lending models. This speeds up the deal-making process and can lead to more favorable terms.

In a crowded market, independent model validation is a powerful competitive differentiator. A fintech can market its solutions not just on their innovative features but on their proven reliability and security. This is particularly effective when targeting enterprise clients or traditional financial institutions that prioritize stability and risk management.

A fintech’s financial projections are heavily based on its models’ performance. An investor’s confidence in the projected revenue, default rates, or customer acquisition costs is directly tied to their confidence in the underlying models. Independent validation provides an external, unbiased review that substantiates these projections, making the investment case more compelling and credible.

Increase Speed to Market

Independent model validation isn’t about creating bottlenecks. It is about becoming an accelerant. A rigorous independent model validation process provides a clear green light for launch. Rather than waiting for multiple, siloed internal teams to manually review a model for risk and compliance, a single, comprehensive validation report gives stakeholders—from product managers to executives—the confidence they need to approve a new product. This standardized and robust review process replaces fragmented, often ad-hoc, reviews that can delay a product launch by weeks or even months.

By identifying flaws early in the development cycle, independent validation prevents costly and time-consuming rework after a product has launched. The validation process catches critical issues like data quality problems, faulty logic, or unexpected model behavior before they affect customers. This means a fintech can avoid:

• Emergency bug fixes that pull development resources away from future projects.
• Reputational damage from a public model failure.
• Regulatory scrutiny that could force a product to be pulled from the market.

This proactive approach ensures that a product is not only functional but also robust and reliable from day one.

Many fintechs rely on partnerships with traditional financial institutions or are subject to regulatory oversight. Both of these processes require extensive due diligence on the fintech’s technology. A pre-existing independent model validation report can drastically reduce the time it takes to get regulatory approval or finalize a partnership agreement. Instead of starting the diligence process from scratch, a fintech can present a comprehensive, third-party-verified report that answers key questions about model accuracy, fairness, and risk. This accelerates the onboarding process, allowing the company to get to market faster with its partners.