What will the future of banking look like? No one knows, but why not wonder? Will cash continue circulating in developed countries 50 years from now? Will all of our financial accounts and assets be living on Web3 technology applications and/or blockchains? Will we continue banking by directly interacting with legacy financial institutions, or will there be a trend to obtain our financial services from more mainstream brands? The possibilities are endless and who knows where we'll end up. But before we can continue our journey of Banking into the future, there are things we need to address and get under control right away.
I've spent the past few years witnessing the conversations surrounding Bank and Fintech Partnerships heat up and this is the first time that I am sharing my thoughts in a public forum. A lot of the talk has been negative, and justifiably so. We have witnessed a growing number of bankruptcies, litigation proceedings and regulatory enforcement actions involving high profile companies and what we commonly refer to these days as "Fintech friendly banks". Instances where millions of customers and investors have been defrauded and lost millions, instances where customer financial accounts and their money has been restricted, moved or closed without notice and instances where sensitive personal data of consumers has been shared with a multitude of new providers without their consent. These developments have now given banks and fintechs the much needed and undivided attention of the regulators.
On June 1 of last year, as we were all preparing for our summer holidays, we received the Interagency Guidance on Third Party Relationships (the "Guidance") - a set of clearly laid out expectations from the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) on how a bank needs to manage and monitor it's third party relationships. The Guidance outlines the need for banks to consider not only compliance but all areas of risk to the bank, to its customers and throughout all stages in the lifecycle of the the bank's third party-relationship. The Guidance goes on to mention that each third party relationship is unique and that a "one size fits all" oversight and due diligence approach will not work. Each bank needs to maintain a comprehensive third party risk management program that is dynamic and can adapt to the each unique third party relationship being established.
The Consumer Protection Federal Bureau (CFPB) then followed up on November 17 with a proposed rule Defining Larger Participants of a Market for General-Use Digital Consumer Payment. According to the CFPB: "the proposed market (as defined in the rule) would cover providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other persons for personal, family, or household purposes. Larger participants of this market would be subject to the CFPB’s supervisory authority under the Consumer Financial Protection Act (CFPA)." Should the proposed rule pass, any digital consumer payments and e-wallet company that meets the larger participant threshold, regardless as to whether they hold regulatory licenses or not, will be subject to direct supervision from the CFPB.
The negative commentary and reaction on LinkedIn every time I went on during the days and weeks that followed the release of the Guidance left me perplexed. I even encountered an article going as far as saying that "Fintech banking was dead". Instead, I'd like to offer a different and positive perspective; has anyone realized how lucky we are in the U.S., that we now have something specific, and which outlines the regulatory expectations? Not only does the Guidance provide third party bank partners validation of their business, it goes as far as to recognize that third party relationships are critical to the future of banking. A direct quote from the introduction of the Guidance mentions the following: "The use of third parties can offer banking organizations significant benefits, such as quicker and more efficient access to technologies, human capital, delivery channels, products, services, and markets."
As I previously asked, have we realized how lucky we are in the U.S. that we have the Guidance and Proposed Rule? For all parties involved, this is the best outcome and one of the most positive developments in recent memory. Colleagues in other countries don't have the same fortune. Regulators in Mexico, for example, have completely banned the concept of BaaS from their regulatory framework under the Fintech regime. In Europe, some regulators are not onboard with BaaS sponsorship models living under a nested agency or distributor framework and are pushing for companies operating as BaaS providers under such a model to become directly licensed. Can you imagine if we had a similar outcome in the U.S?
We have challenges, but we now have regulatory legitimacy as critical players to the future of banking along with unambiguous guidelines. As with all regulated industries, the bar will continue to be raised. Let's use this to our advantage. It's up to all of us to make sure we keep our fortune. It's up to the entire industry to come together in true partnership, up to every bank, company, fintech and founder do their part, and to make sure we can continue writing the story of Banking into the future.
If you are a bank looking to get into the space or if you are a fintech trying to strengthen your position, I look forward to chatting with anyone interested in learning more or someone simply interested in exchanging thoughts about this topic. For more information or to schedule an intro call, email us at: info@paarcconsulting.com.
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