Rapid innovation cycles can often outpace the ability of risk management frameworks to adapt.
This is being made evident across the banking-as-a-service (BaaS) landscape, where the discrepancy between financial innovation and regulatory compliance can harbor unforeseen risks, as recent marketplace events have shown, and as experts have highlighted to PYMNTS.
Central to the innovation-regulation gap within financial services is the ongoing transformation of money movement itself. From online banking to new payments infrastructure — including instant rails and increased data portability as a result of open banking — money has never been more agile and less sticky.
And with the news that the Federal Deposit Insurance Corporation (FDIC) has put out a request for information meant to investigate, in part, whether the ability of BaaS platforms to shift deposits to a different bank could pose a safety and soundness risk, the stickiness of funds and the compliance framework around them is top of mind alike for banks looking to innovate and FinTech firms looking to grow through key partnerships.
Read more: Payments Execs Debate Banking’s Transformative Future
The FDIC Wants to Know How Money Behaves in Different Scenarios
The FDIC’s request “seeks information on the characteristics that affect the stability and franchise value of different types of deposits and whether more detailed or more frequent reporting on these characteristics or types of deposits could enhance offsite risk and liquidity monitoring; inform analysis of the benefits and costs associated with additional deposit insurance coverage for certain types of deposits; improve risk sensitivity of deposit insurance pricing; and provide analysts and the general public with accurate and transparent data.”
It comes against a backdrop where digital transformation has first challenged and now changed long-held assumptions about the character and behavior of customer and commercial deposits held by financial institutions.
“The regulators are now awake,” Thredd CEO Jim McCarthy told PYMNTS in June. “Too many people are focused on the ‘as a service’ part — but have ‘minored’ in the banking part, if at all.”
During a conversation for the “What’s Next in Payments” series, Ingo Payments CEO Drew Edwards told PYMNTS’ CEO Karen Webster: “Regulatory orders and regulatory scrutiny have taken a front seat in the industry. We’ve gone through a bunch of these cycles over the last 23 years, but this regulatory environment is back to where the bank sponsorship [model] is getting tighter and more difficult.”
At the same time, bank and FinTech partnerships are becoming more and more crucial — especially when applied to enhancing customer experiences, expanding market reach and improving operational efficiency within the financial services sector.
Read more: Payments Execs Say Banking-as-a-Service Players Forgot the Banking Part
PYMNTS Intelligence found that 65% of banks and credit unions have entered into at least one FinTech partnership in the past three years, with 76% of banks viewing FinTech partnerships as necessary to meeting customer expectations. And a full 95% of banks are focused on using partnerships to enhance their own digital product offerings.
A recent PYMNTS Intelligence report, “Embedded Finance and BaaS: From Marketing Buzz to Banking Bedrock,” in collaboration with NCR Voyix, showed that the integration of application programming interfaces (APIs) is transforming financial services by embedding them into daily digital interactions.
“Obviously, there’s a lot of work to be done on traditional financial institutions’ backends. Their systems need to be upgraded. They need to build these capabilities in, and that’s cost. So, there are challenges, but uptake is increasing exponentially,” Ram Sundaram, COO at TerraPay, said to PYMNTS.
As FinTechs continue to push the boundaries of what is possible in financial services, the need for robust risk management practices and adaptive regulatory frameworks has never been more apparent — and the marketplace is already responding.
PYMNTS reported last month that risk management platform Cable launched a partnership with Texas-based Vantage Bank designed to help Vantage improve its compliance and risk management as it expands its FinTech program and partnerships.
As money becomes more agile and end-user expectations trend toward real-time convenience, financial services will need to change to keep up. But within this environment, compliance will remain a constant.
