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  5. Double Jeopardy? Fintech Partnerships under a Regulatory Microscope

Double Jeopardy? Fintech Partnerships under a Regulatory Microscope

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10 August 2023
Colin Kerr

What a year of events for banks innovating through fintech partnerships.

Adventures in the Open Banking Ecosystem: Considerations for Corporate Banking Partnerships, (December 2022) discussed some of the challenges for fintech-bank partnerships. This was before the US regional banking crisis in early 2023. Ultimately, it is the bank that is regulated and will be the party to bear regulatory wrath if things to go wrong.

As noted in a subsequent blog from May 2023, Misadventures in BaaS – Back to Basics in Partner Management, it was inevitable that the heightened risk sensitivity around the banking ecosystem would only encourage closer regulatory attention to bank-fintech partnerships. Well, now we have the two major regulatory entities in US banking weighing in on oversight of innovation.

  1. In September 2022, the Office of the Comptroller of the Currency (OCC) took what looked to be a very pragmatic step to address/mitigate emerging risks in the banking ecosystem related to fintech innovation. Although recognizing the value of fintechs, the OCC also wants to ensure that innovation is “responsible.” Within that remit, an “Office of Innovation” was formed to ensure ecosystem innovation (by regulated banks and non-bank technology institutions) occurs within a framework overseen by the OCC. Refreshingly, the regulator of US banks proactively seeks cooperation and collaboration from ecosystem participants, not merely after-the-fact enforcement.
  2. In August 2023, the Federal Reserve, probably in response to the regional banking crisis and crypto risks, announced it will supervise “novel activities” in the banks it oversees. Of course – the Federal Reserve will also be concerned about any “novel activities” that may impact the new FedNow payments service. According to the press release, novel activities include “complex, technology-driven partnerships with non-banks to provide banking services to customers; and activities that involve crypto-assets and distributed ledger or "blockchain" technology.” That’s a broad, sweeping statement of scope, and pretty much covers a bank’s innovation strategy!

The goal of the Fed’s supervision is to “foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system.” That is laudable, but at the same time the introduction to the Novel Activities Supervision Program seems very similar to the intent of the Office of Innovation, presented by the OCC. As these programs are rolled out, no doubt we will see some unique aspects of the Fed’s scope – probably around crypto currency and blockchain.

Banks – you must hope (and advocate) for alignment on overlapping oversight from the regulators. In Adventures in the Open Ecosystem I suggested that banks proactively engage regulators as needed. Now, with banks in the US having two government entities looking over their shoulders – this is doubly true.

Fintechs – you can probably expect more of the traditional vendor management rigor and due diligence from your bank partners. Buckle up.

What other shoes might fall? European regulators – over to you…