The bank-fintech landscape has faced increased regulatory attention, particularly following the collapse of middleware provider Synapse that disrupted thousands of customer deposits. In response, federal banking agencies issued guidance to banks on managing relationships with third-party vendors in the realm of deposit products, alongside a request for information regarding these partnerships. Notably, the FDIC proposed new recordkeeping requirements for banks accepting deposits from fintech firms—a sector that has rapidly evolved from back-end systems for major banks to a broader consumer service offering.
This regulatory scrutiny has been compounded by several consent orders issued against banks involved with fintech partnerships, highlighting the risks involved in embedded finance initiatives. The first half of 2024 saw a significant uptick in enforcement actions targeting bank sponsors linked to such collaborations.
While the enthusiasm for bank-fintech collaborations might have cooled, the path forward remains uncertain. A critical concern is the tendency to uniformly regulate fintech providers, which could unfairly burden smaller banks that heavily depend on these services. Instead of a blanket approach, a more discerning and efficient regulatory framework is suggested to foster innovation within the sector.
The year 2024 has been rife with both advancements and overreach in regulatory measures. Community banks, in particular, felt the negative impact of the Synapse failure, with regulators applying broad rules that ultimately do not reflect the nuances of different institutions. Additionally, variances in rule interpretation by examiners have contributed to the existing confusion.
Before implementing new regulations, it is crucial for regulators to focus on the specific risks presented by various fintech partnerships. Solutions that pertain to deposit-taking should be prioritized due to their direct consumer implications and the potential for financial fallout—most vividly illustrated by the collapse of Synapse. Other fintech functions, such as digital loan platforms, should be evaluated through a different lens, as they often embody sound governance and collaboration.
A proposal for a “regulation-lite” framework could encourage continued innovation while ensuring compliance with necessary safety standards. This framework could include a straightforward checklist for banks and their fintech partners, addressing essential questions related to due diligence, ledger visibility, and contingency planning.
Several industry players exemplify best practices in this domain. For instance, Treasury Prime integrates its ledgers with client banks, providing a safeguard through access to its database if its services were to be disrupted. Similarly, Chime Financial ensures its partner banks have complete access to financial performance data, which mitigates potential operational failures.
Reports indicate that compliance teams at banks should prioritize practices such as “ledgering hygiene,” ensuring clear separations of funds across different accounts for customers, operations, and other financial obligations. This clarity could prevent mismanagement and enhance accountability.
In the face of regulatory challenges, emerging collaborations and increased information sharing among fintech and banking sectors signify a positive shift. The establishment of initiatives like the Coalition for Financial Ecosystem Standards, which seeks to create uniform standards for third-party relationships, reflects this trend.
While the integration of staff, technology, and compliance is complex, the necessity for banks and fintechs to collaborate is more pronounced than ever. Implementing a regulation-lite approach could serve to promote transparency and proactive engagement, supporting both industries in reaching their full potential while navigating the evolving regulatory landscape.
The call for regulatory sandboxes has been discussed as a means to allow fintechs to explore the banking environment in a controlled manner, which could further encourage innovation without incurring unnecessary risks. As the relationship between banks and fintechs continues to evolve, creating a balanced regulatory approach that promotes innovation while protecting consumers is essential for long-term success in the financial services sector.