As OCC Looks Into BaaS, Banks And Fintechs Should Do Trust Building
It’s possible that banking-as-a-service (BaaS) providers and fintechs have grown into unique and mature ways to work together, which means that regulators should update and change their rules.
Acting U.S. Comptroller of the Currency Michael J. Hsu spoke at The Clearing House and Bank Policy Institute’s Annual Conference earlier this month. He talked about the Office of the Comptroller of the Currency’s (OCC) official guidance for maturing requirements on bank and fintech partnerships.
The OCC’s actions may seem to impose new rules, but if past rules are any indication, they will likely only impose best practises across an industry. This could force less experienced companies out of the market, which could make the companies that are left stronger, but the federal government would be responsible for any harm that might come from their market power. All of this is to say that sometimes you just have to move up to the next weight class.
In any case, we should keep in mind that regulators are in charge of protecting people who buy and use financial services, even if we don’t agree on the details. Instead of avoiding these partnerships out of fear of more rules, banks and fintechs should see this as a chance to strengthen their relationships with each other, regulators, and their customers.
Current rules and regulations
Simply put, when a bank and a fintech company work together, the chartered bank has the most responsibility and risk for compliance. But this is an area where regulations are changing all the time. It’s important to note that the OCC is just one regulator, and because it only watches over larger national banks, it doesn’t actually watch over most banks in the U.S. We think that the U.S. federal prudential banking regulators, the FTC, and state regulators will work together to make the biggest difference in this area. Here is a summary of what some of the most important people in the regulatory world think about partnerships between banks and fintech companies:
OCC
In August 2021, the OCC put out a 20-page guide that told community banks that work with third-party fintech companies to do their homework on those companies. Along with Hsu’s recent comments, the OCC ordered Blue Ridge Bank to do more due diligence and keep a closer eye on its partnerships with third-party fintech companies.
Corporation for Federal Deposit Insurance (FDIC)
Even though the FDIC insures all banks, many partner banks are small or medium-sized banks that are often directly regulated by the FDIC. The FDIC has its own guide on how banks should manage their partnerships with third-party fintech companies. And since the OCC and CFPB are still taking this issue seriously, we expect the FDIC to do the same.
Bureau for Consumer Financial Protection (CFPB)
Since he was confirmed as CFPB Director in 2021, Rohit Chopra has made it clear that he is keeping a close eye on non-banks in financial services. “Local banks and other financial institutions that follow the law should be treated the same as big tech companies that use the treasure troves of data,” he said soon after being confirmed.
Commission on Federal Trade (FTC)
The FTC has been a watchdog for consumers for a long time. It helps the federal government enforce a number of consumer finance laws, such as the Gramm-Leach-Bliley Act (GLBA), which says how financial institutions can use consumers’ private information. The FTC will continue to have an effect on public policy, especially when it comes to privacy requirements at banks. This means that banks and fintech partners need to compare the privacy requirements of this federal regulatory body to those of states and other countries.
State regulators
In the United States, both the federal government and the states have rules about the financial services industry. Historically, states haven’t been too interested in regulating partnerships between banks and fintech companies. This is likely because partnerships make it harder for companies to get state licences, which means less money for states. State laws are different, and many states are already taking more steps to keep an eye on partnerships between banks and fintech companies. Recently, state attorneys general have criticised bank partnerships as “rent-a-bank” schemes that let fintechs avoid following state laws, especially usury laws. Because of this, states are now challenging the bank partnership model in the same way that federal agencies are.
Bank and fintech partnerships in the future
Examiners will ask partner banks more questions about their most important service providers to make sure that they have enough oversight and control over the programmes they offer through fintech partnerships. Banks will need to be able to prove the integrity of their own third-party vendor management systems to show that their partners are in good enough shape to provide the services the bank is paying for. This shouldn’t make banks nervous or slow down their plans to work with fintech companies. They should look at their current programme for managing vendors and make sure it’s enough. It’s always best to find a problem on your own before regulators show up, and partner banks will have to show regulators more and more that they do the right due diligence on third-party vendors.
It’s business as usual for fintechs that already know a lot about the highly regulated financial services market. One of the most important jobs of fintechs in bank partnerships has always been to help their partner bank meet regulatory requirements, such as BSA and KYC/AML compliance, transaction monitoring, and data security. This is even more important now than it was before.
This means that both banks and fintechs will have to work on building trust with each other.
Building a “partnership based on trust”
Many of us have done a trust fall with a team member at some kind of team-building retreat. In a way, banks’ partnerships with fintech companies are kind of like a trust fall. All they can do is make sure their fintech partners understand the rules and keep a close eye on them. They also have to trust that their fintech partners will follow the rules.
Fintech has a lot of work to do to show the bank that they can be trusted with this important task. But trust does not mean that the fintech partners and their programmes don’t need to be watched. Trust means setting up a way to work together and a process that both meets the regulatory and risk needs of the banks and helps the fintech programme get started and grow.
Here are some concrete things fintech companies and partner banks can do to build trust:
Hire competent compliance people. Fintechs need to learn more about the rules and regulations that affect them. It starts with recognising that “fin” is a part of “fintech” and being happy about it. There will be more oversight, and fintechs should have people who understand the rules and can defend their programmes. Look for people who have worked in this highly regulated area before and know the risks;
Talk to each other often. Banks and fintechs should meet once a week with their compliance and risk teams. It’s important to keep the lines of communication open, especially since rules are always changing.
Quickly answer. In partnerships between fintechs and banks, it’s important to be responsive. If partner banks don’t follow the rules, it could hurt their finances and reputation, so fintechs need to make sure compliance is a top priority.
Board a plane! Banking is still mostly done in person and face-to-face. Getting on a plane and meeting in person will go a long way toward building trust. If you can’t meet in person, hitting the dreaded “video on” button on your Zoom will also help.
Looking ahead
The OCC’s recent remarks and actions against Blue Ridge Bank are just the tip of the iceberg. When you consider the OCC’s recent statements and the fact that the CFPB is an aggressive regulator, it’s only a matter of time before other regulators follow suit and keep tightening rules on bank and fintech partnerships. This could make its way down to third-party infrastructure providers as well. These providers should also keep an eye on this space, hire people who know how to navigate it, and build trusting partnerships with their bank and fintech partners.
