Diving brief:
- Tighter regulatory oversight could slow innovation, but additional safeguards are needed because fintech-bank partnerships become more complex and as fintech take on more responsibility for compliance, analysts said at the conference on Tuesday Finovate Fall conference in New York.
- “Most of the enforcement actions we’ve seen over the past two years are because risk management and compliance issues weren’t addressed upfront,” Donna Murphy, deputy controller of corporate policy. non-compliance risks at the Office of the Comptroller of the Currency, said Tuesday. “This type of careful, cautious approach to innovation is what we expect from banks. …Will it be slower than financial technology Doesn’t that have the same considerations? Probably, but it doesn’t matter.
- Increased attention from American and European regulators on fintech-bank partnerships would introduce new costs and affect “build versus buy” considerations, said Yossi Leon, chief technology officer at FIA Tech and assistant professor at New York University. “There’s no doubt that (regulation) will slow down innovation, because it’s just more expensive to set up compliance or hire the right team to make sure you’re in compliance with compliance in different geographies ” he said. “It will cost more to purchase because the cost of innovation is higher. »
Dive overview:
Bank-fintech partnerships have faced increased scrutiny from regulators over the past year, Federal Deposit Insurance Corporation.THE OCC And Federal Reserve issue consent orders to banks working with fintechs. The day after Synapse bankruptcy case – in which more than 100,000 customers were locked out of accounts with partner banks due to disputes over user balances – the FDIC plans to issue a proposal requiring banks to maintain records of accounts “for the benefit of” opened by third-party fintechs, Bloomberg Law reported last week.
Murphy pushed back against claims that interagency guidelines on third-party relations issued in June 2023 was more prescriptive than previous frameworks set by regulators.
“The bank is always responsible for complying with all laws and regulations,” she said. “The expectations we have as supervisors are described in some detail, but they are not prescriptive. It doesn’t say “This is how you should implement this particular thing.” »
His remarks appeared to run counter to previous comments from Jonathan McKernanFDIC board member, who said in July that it was possible to provide activity-specific guidance within existing guidance.
Murphy said the latest interagency guidance represents a “slight update” from the previous iteration that had been in effect for a decade. The new guidance reflects the growing complexity of bank-fintech partnerships, she said.
“(Bank-fintech partnership) agreements sometimes become more complex, with a third party not only providing a particular service, but perhaps also ensuring compliance,” which amplifies risks, she said.
Kristin Lee, investment management partner at Morgan, Lewis and Bockius LLP, said regulators are asking more questions about how banks determine third-party risks, as well as governance considerations.
A closer look at partnerships between banks and fintech could strengthen the business case for AI-powered compliance platforms, Leon said.