Fintech
Stop Stifling Innovation Inherent in Bank-Fintech Partnerships
When it comes to banking and fintech relationships, misguided politics and regulatory forces threaten the spirit of innovation that has brought so many benefits to consumers, writes Gilles Gade of Cross River Bank.
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This year we celebrated the 248th birthday of the United States and the 16th anniversary of Cross River Bank. For me, they go hand in hand.
The deep democratic ideals that form the foundation of this nation inspired me to move from my native France to the United States more than three decades ago. Arriving with 90 days’ worth of cash in hand looking for adventure on Wall Street, I found that financial services were beyond the reach of a new immigrant: opening a bank account, renting an apartment, or getting a credit card were nearly impossible. It was even worse for low- and middle-income Americans, and even worse for people of color. Today, thanks to innovation, those same Americans have far greater access to financial services and products, most from providers that didn’t exist when I arrived in the United States. But the journey of financial inclusion for all is far from complete.
The emergence of financial technology has been extremely positive for the United States. Financial technologies have been the source of much-needed innovation in banking. They have increased competition and awakened traditional banks from decades of complacency, bringing some, but not all, of them back to being customer-centric. They have found ways to bring products to people who have traditionally been left out of the market, and they have done so with care, fairness, and integrity. Many have been highly successful, and as with all innovations, some have failed. There have been some compliance issues over the years, but they have been small, had limited impact on customers, and were quickly resolved. Over the years, there have often been issues where an innovative approach from a financial technology has challenged a lack of regulatory clarity or, worse, regulations that have not advanced at the same pace as technology development.
Almost all fintechs need a bank as a partner. Unfortunately, we believe that the future of fintech and banks serving fintech communities is in jeopardy today.
Of the approximately 4,800 banks in the United States, fewer than 100 provide banking as a service, or BaaS, to fintech partners. Of those, about 20 are very active, a dozen of which are key players in the BaaS ecosystem. Of the 12 such banks, 11 (including Cross River) have been subject to consent orders and enforcement actions by their regulators since September 2022. These numbers are concerning both on a policy and practical level. Does this mean the bank-fintech partnership model is broken and unviable? We firmly believe the opposite, that the bank-fintech model is absolutely viable, but is struggling with a broken regulatory model.
From a supervisory perspective, there is little that banks can publicly disclose about the facts underlying a consent order. A high-level survey of recent consent orders shows some common threads: (a) an alleged compliance issue with a fintech that may not be widespread or systemic comes to the regulator’s attention; (b) regardless of whether the alleged consumer harm actually exists, the regulator inevitably “wins” the argument against the bank based on inherent power; (c) the resulting consent order imposes limits on the banks’ future business and affects every fintech in those banks’ respective portfolios, potentially forcing banks to dump fintech partners who then struggle to find other banking partners, impacting millions of consumers. The chilling effect reverberates throughout the banking industry, and the message other banks receive is “don’t innovate.”
Why does this matter? Because innovation is what sets the United States apart from a host of other developed nations. Innovation has fueled the American economy and given millions of Americans access to financial products and services.
Responsible banking and fintech partnerships have made a significant difference in the lives of many Americans who would otherwise lack access to credit or banking services. Those with an absolute commitment to compliance, safety, and soundness are relentlessly striving to maintain the highest standards while working to address the ever-increasing complexity and breadth of a responsible banking and fintech partnership business model.
If BaaS as a business model fails to survive, the financial lifelines that consumers have accessed through fintech face an existential threat. Innovation thrives in a society that values dialogue, education, and openness. Consumers benefit from a range of choices in financial products and offerings, and with market forces at work to drive competition. America must never cease to be the global leader in innovation and entrepreneurship. However, misguided policy and regulatory forces threaten the very foundation of that innovative spirit and limit consumer choice.