In the wake of heightened regulatory scrutiny, the relationship between banks and fintech companies has faced significant challenges, particularly highlighted by the recent collapse of middleware provider Synapse. This event left thousands of online customers in a precarious position, prompting a response from federal banking agencies.
Last summer, these agencies issued an interagency statement aimed at providing clear guidance to banks regarding their relationships with third-party providers, especially concerning deposit products. Additionally, the Federal Deposit Insurance Corporation (FDIC) initiated proposals for new recordkeeping regulations specifically targeting banks that engage with fintech firms.
The fallout from this collapse has led to consent orders against multiple banks regarding their partnerships with fintech companies. In fact, during the first half of 2024, it was found that over 25% of the FDIC’s enforcement actions were related to issues involving bank sponsors engaged in embedded finance partnerships.
With the downturn in the bank-fintech relationship, the next steps remain uncertain. A blanket approach that uniformly applies additional burdens to all fintech providers, particularly smaller lenders that depend heavily on these partnerships, is not a viable solution. A more effective regulatory landscape could emerge, with fewer yet more strategic regulatory bodies fostering a supportive environment for innovation.
The events of the past year have created a unique opportunity to reassess and improve regulatory policies. The push for a new “regulation-lite” framework has gained traction, highlighting the need for a balanced approach to regulation. While 2024 witnessed some promising developments in bank-fintech regulation, there were also instances of excessive regulations that created confusion and inconsistency. Community banks, in particular, have struggled in light of the scrutiny that has led to generalized assumptions about all institutions based on the actions of a few.
As regulatory bodies continue to evaluate their approaches, it is crucial they focus on identifying genuine risks rather than assuming all fintech partnerships carry the same level of risk. For example, deposit-related relationships warrant different considerations than those involved in digital loan platforms, which can offer a robust model for governance and partnership.
The development of a light-touch regulatory framework might include a checklist format for banks and fintechs that evaluates key issues such as due diligence practices, visibility into financial performances, and contingency plans. Establishing clear roles and responsibilities as well as appropriate reporting guidelines would also be essential components of this new framework.
Among best practices in the industry, certain fintech firms have set examples worth emulating. For instance, Treasury Prime, a banking-as-a-service vendor, has designed its systems to maintain transparency and accessibility for its partner banks, ensuring continuity in the event of disruptions. Similarly, Chime Financial’s coordinated strategies with banks emphasize the protection of customer funds to prevent operational failures.
In addition to these practices, there has been a noted increase in cooperation between banks and fintech companies following last year’s turmoil. The establishment of the Coalition for Financial Ecosystem Standards exemplifies a proactive approach to ratify standards for third-party relationships in the financial services sector.
Looking ahead, the reintroduction of regulatory sandboxes could be beneficial in allowing fintechs to gain practical experience while ensuring that innovation occurs in a safe, monitored environment. Ultimately, both banks and fintechs rely heavily on one another; thus, a regulatory framework supportive of innovation, transparency, and collaboration is integral to realizing the full potential of their partnership. As the landscape continues to change, strategic collaboration will be essential for navigating future challenges and opportunities within the bank-fintech realm.