The Takeaway — Fintech Partner Banks Growth, New OCC Regulatory Office
Every first Tuesday of the month we compile some of the most important and interesting embedded finance, fintech, and banking news stories and tell you why they matter. Find last month’s edition of the Takeaway here.
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1. Fintech partner banks see significant growth:
Despite the doom and gloom of a recession that is more and more likely to happen, fintech partner banks are seeing deposit volume growth that is outpacing their commercial bank counterparts of a similar size.
10 out of 15 fintech partner banks in the $1 to $3 billion asset range reported a double-digit increase in total deposit volume for 2022. The driving force behind this deposit growth — in a time of economic downturn no less — can be tied to their banking as a service partnership with fintechs. These community banks that engaged in banking as a service grew deposit volume above the forecasted 1.8% for 2022, with one even growing deposit volume by 87%.
While these fintech partner banks saw significant deposit growth, they on average had a lower overall deposit volume; however, they also reported a larger number of accounts due to their fintech clientele.
The Takeaway: Banking as a service is quickly becoming table stakes for banks, particularly smaller financial institutions, and community banks. Not only is banking as a service attractive to fintechs and enterprises looking to innovate their products and services, but it’s also a way for banks to remain competitive and access new revenue streams they wouldn’t have been able to before.
Where community banks may struggle is understanding how they can get started with banking as a service and how it can affect their day-to-day operations. With the right BaaS provider, the transition can be seamless — and compliant — and doesn’t require a complete technical overhaul.
Curious about banking as a service and not sure where to start? Our team is here for you. Contact us now to ask us anything.
2. OCC announces Office of Financial Technology:
The Office of the Comptroller of the Currency (The OCC) is opening a new office to focus on fintechs and the bank-fintech relationship. The move comes as a response to the rapid growth of fintechs and after Acting Comptroller Michael Hsu previously warned against the evolving risks that come with the “de-integration” of banking resulting from the bank-fintech relationship.
The newly appointed office, set to open in early 2023, is meant to provide the agency with more fintech expertise and to “promote responsible innovation,” and “ensure that the federal banking system is safe, sound, and fair today and well into the future” as bank-fintech partnerships show no signs of slowing down.
The announcement of this new office also comes amidst conservative lawmakers’ chatter around over-regulation of the bank-fintech relationship. In a recent letter to Hsu, House Republicans expressed worry that tightening regulation could stifle innovation that could otherwise lead to faster and better products and services, cost savings, and increased competition.
The Takeaway: Federal regulators like Hsu have been vocal about their stance on the ever-increasing amount of bank-fintech partnerships and the complexity that comes with them. The creation of the upcoming Office of Financial Technology sends a clear signal that regulators are craving more oversight and management into banking as a service and the growing number of banks and fintechs that take part in a BaaS relationship.
As regulators continue this drumbeat of increased regulatory scrutiny, it is more important now than ever for fintechs to be active participants in how they manage their compliance alongside their partner banks. BaaS providers who absorb compliance responsibility are only doing a disservice to their fintech customers. Every fintech’s risk profile and compliance framework should look unique and should not be treated with a blanket solution. Fintechs who take an active role in their compliance are best positioned to weather any likely regulatory fallout and to mitigate the reputational and regulatory risk of their partner banks.
Regulatory scrutiny is growing around the bank-fintech relationship. Watch our on-demand webinar featuring a regulatory innovation officer about navigating today’s regulatory environment here, and learn how you should start preparing now.
3. U.S. Treasury also calls for closer supervision of bank-fintech partnerships:
The U.S. Treasury has taken a similar stance as the OCC.
In a recent report, the Treasury says that with the influx of fintechs, there is increased risk to consumers and a threat to the integrity of the market. The report also suggests that some fintechs are taking advantage of regulatory loopholes to bypass important steps of compliance and that such behavior can foster unhealthy competition.
Janet Yellen, U.S. Secretary of the Treasury remarked that while “non-bank firms” like fintechs can encourage innovation, they need to be subject to firmer regulations to protect American consumers.
“With existing authorities, regulators can encourage competition and innovation while further safeguarding and protecting consumers,” she said.
The report outlines recommendations moving forward, including mandatory regulatory compliance for bank-fintech partnerships, increased regulatory oversight, and regulatory support of innovation in sectors like consumer credit underwriting to provide better credit visibility to underserved customers.
The Takeaway: As federal regulators and agencies continue to stress the need for increased regulatory scrutiny over the banking as a service space and bank-fintech relationship, there is still a missing elephant in the room: Regulations aren’t yet solidified.
Because there are yet to be any mandated regulatory measures, fintechs should be proactively preparing for what might be coming from regulators. Understandably, this might be a tough pivot for fintechs, especially smaller ones that are more cash-strapped against today’s economic backdrop. However, it is an important step to take. As fintech commentator Simon Taylor put it in a recent newsletter “There's really no such thing as outsourcing regulation to a [BaaS] provider. Just streamlining. There's no downside to being amazing at regulatory and compliance if you're a non-finance brand.”
Learn more about Treasury Prime’s compliance solution that helps every fintech or enterprise design a compliance framework that protects your business and evolves as you scale.
4. Fed prepares for a central bank digital currency:
The Federal Reserve is working to launch a central bank digital currencies system (CBDC), or essentially a digital version of the U.S. dollar.
The CBDC is a liability of the Fed and is issued by the American central bank, as opposed to a private company. Stirrings of a potential CBDC began in January 2022 when the Biden administration released a paper examining the pros and cons of releasing a CBDC and invited public input. What followed was largely negative feedback.
Critics believe CBDC is unnecessary given that the benefits of digital assets are currently being met by other digital currencies and stablecoins; others believe the CBDC opens up a whole new avenue of security risks, and some in the crypto community feel the government is edging towards a stranglehold on the digital asset space.
However, it appears that the Fed is pushing forward with their plans anyway, with some experts predicting that it could take up to five years for the CBDC to be released — and possibly longer given the split Congress.
The Takeaway: As we’ve discussed in previous editions of The Takeaway, the digital currency and asset space is a tricky one. Cryptocurrency and its lack of regulatory provisions provide us with an obvious cautionary tale.
As even the U.S. government gets involved with a new way for Americans to manage and spend their money, it’s becoming more important for fintechs and banks to keep a finger on the pulse of financial services in this country. Embedded finance has become an important way for both banks and fintechs to drive revenue and as the financial landscape continues to evolve, understanding how to best utilize embedded finance to meet consumer demand and behavior could be a make or break.
5. Twitter eyes payments:
With new ownership comes new ideas at Twitter, including adding payments to the platform. New head tweeter, Elon Musk outlined plans to enable Twitter users to send payments to one another by drawing funds from users’ authenticated bank accounts.
A use case for this? Paywalling Twitter creator content that other Twitter users could pay to view. As the payments program scales, Musk also mentioned the possibility of inviting Twitter users to open high-yield bank accounts directly on the platform alongside connected debit cards.
While there doesn’t seem to be a firm timeline for when Twitter would officially launch any payment features, the social media giant does appear serious with its filing with the Treasury Department’s Financial Crimes Enforcement Network.
The Takeaway: A testament that from small enterprises to one of the leading social media giants, embedded banking is top of mind, even for the world’s richest man.
Musk’s take on Twitter’s embedded finance strategy is an interesting one, trying to morph Twitter into an everything-app. One major reason to give embedded banking a shot is to make a platform stickier — make it more convenient for end users to do the things that they want to do, and stay on the platform to do it.
However, taking a strategic approach to payments is crucial to any fintech undertaking. Bank accounts and connected debit cards may not be the best first step for Twitter, according to Treasury Prime cofounder and CEO Chris Dean. Digital wallets may be the most cost effective way to go in the beginning. Get Dean’s full take on how Musk should approach embedded banking on Twitter here.