Fintechs need to become proactive in setting industry standards

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In the past decade multiple fintechs unicorn status achieved by collaborate with banks.

These partnerships are now in jeopardy. Together with innovation and customer choice.

Once a niche concept, banking partnerships have become one of the most important innovations in financial services. Banks issue regulatory licenses and hold deposits, while their partners provide technology and distribution. They promote competition and consumer choice, and they give community banks a path to business growth.

If companies want to continue working with banks to develop innovative financial services, they must stop viewing regulations as their partner banks’ problems and become part of the solution. They must develop standards that clearly define robust risk management and regulatory compliance. They must be assessed by independent third parties, holding themselves (and each other) accountable. They need to bring themselves into the regulatory fold.

The rapid growth in the number of banking partnerships in recent years has rightly attracted the attention of regulators. Recent events, such as the bankruptcy of Synapsedrew attention to the potential harm to consumers if these partnerships go wrong. More fundamentally, they raise broader questions about the safety and soundness of a financial system that is increasingly distributed through partners that are not themselves regulated as banks.

Supervisors act on their alarm. Through the first half of 2024, there were 46 formal enforcement actions brought by federal banking agencies – the Office of the Comptroller of the Monet, the Federal Reserve and the Federal Deposit Insurance Corp. – of which almost 24% was received by cooperating banks. with non-banks.

The message is clear: consumer protection must be inviolable. The safety and soundness of our banking system are of crucial importance.

At the same time, we cannot let our fear undermine the need for competition and consumer choice. Nearly twenty years ago, I opened my first bank account with Washington Mutual. JPMorgan Chase absorbed them. A few years later I went to work at First Republic Bank; they underwrote me for a mortgage that JPMorgan Chase did not want. Last year’s acquisition of First Republic means I am once again a JPMorgan Chase client. A few weeks ago, JPMorgan Chase said boldly announced that they may charge fees for basic banking services.

When I searched for community banks in the area, I found that many banks were closed. Digital-first products built by companies working with banks offer some of the best alternatives. Not surprisingly, three out of five Gen Z consumers and millennials whose primary checking account is with a digital bank, will have that account with Chime, PayPal or Cash App – all of which use banking partnerships.

As community banks face increasing pressure from major banks that are now bigger than ever, these partnerships offer a lifeline. The impact is clear: banks that entered into partnerships saw an average sequential deposit growth of 2.2% in Q2 2023, while other U.S. banks with assets under $10 billion experienced a 0.8% decline.

Regulators have made it abundantly clear that they will hold these banks accountable to their partners. But this model will break if we only focus on the role of banks in regulating fintechs; their partners must support the ecosystem by formalizing the compliance and risk management standards under which they operate.

It’s time for these fintech partners to step up.

Companies that work with banks must take a more proactive role in standardizing risk management expectations. They must translate their innovative business models into terms that both their partner banks and regulators can easily digest.

As the founder and CEO of a company that partnered with a bank, I know how important it is for banking partners to take more responsibility. It’s the same philosophy we adopted at my previous fintech: we knew early on that absorbing some of the burden around compliance and security in banks would be critical to the long-term viability of open banking.

The financial services industry is at a crossroads. Bank partnerships provide the path to a more competitive, innovative future. But this future depends on the willingness of partners to work together as an industry and set standards for compliance, risk management and certifications, in addition to regular audits. Although these companies are not banks themselves, they are increasingly an extension of the financial services industry and must help their banking partners certify strict compliance.

Otherwise, the partnerships that provide a lifeline to banks and consumers today could inadvertently break the backs of the community banks they are trying to help tomorrow.