The Takeaway — October 2022

A monthly round-up of the biggest stories in embedded finance and why you should care
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Patrick Wong
October 4, 2022
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Every first Tuesday of the month we give you 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. BaaS to hit the mainstream:

Anything but a one-hit wonder, a recent study predicts banking as a service (BaaS) will have mainstream adoption within two years. The Gartner study projects that banks with more than $1 billion in assets will employ BaaS to find and generate new revenue by 2024.

These findings are in line with similar studies about the rapid growth of the BaaS industry, including a forecasted $38 billion in BaaS-related revenue globally by 2027 — a dramatic uptick from the $11 billion in 2022. This study in particular examined leading BaaS platforms and evaluated product offerings, partnerships, and future business prospects.

And as we’ve included in a previous edition of The Takeaway, investors at Money 20/20 Europe noted BaaS and embedded finance as a big area of interest.

Speaking of Money 20/20, we’ll see you in Vegas! Find us at booth #1301. Schedule a 1:1 meeting with our team here.

The Takeaway: It should come as no surprise that BaaS is having its moment in the sun. Financial institutions and financial tech companies alike — plus the enterprises that crave embedded financial services — all stand to gain a lot from the embedded financial services that BaaS enables.

New revenue streams, increased lifetime value of customers, and rapid product innovation are now possible for any company thanks to BaaS. People don’t spend and interact with their money like they used to and those that adopt BaaS can keep up with that changing behavior. Learn more about what bank and fintech opportunities there are with BaaS on our blog.

2. OCC’s hard look at fintech-bank relationship:

Acting Comptroller of the Office of the Comptroller of Currency Michael J. Hsu proclaimed in a recent speech that the surging growth of banking as a service is an area of concern for the regulatory body.

The resulting “de-integration” of banking caused by BaaS has not only made it difficult for regulators and customers to draw boundaries between the bank and fintech, but could open the entire financial system to a risk of a crisis. The situation seemed dire enough for Hsu to liken the possible catastrophe to the financial crisis of 2008.

With more and more institutions and companies getting in on BaaS, Hsu says he’s concerned about a “race to the bottom with pressure to cut compliance corners.” He says the OCC will be working to better define the relationship between banks and fintechs, more clearly assess risk profiles in the bank-fintech relationship, and address any regulatory blindspots.

Hsu admits there’s a lot of work to be done, but the work has already started and will continue for quite some time.  

The Takeaway:
At the core of Hsu’s concerns about the bank-fintech relationship is defining the roles and responsibilities between the two bodies. While it’s not clear what specific next steps the OCC will provide in their work to mitigate risk in the banking as a service space, it seems compliance will play an even bigger role as BaaS and digital banking — and the rules that govern them — continue to evolve. This underscores the notion that offloading compliance or believing compliance is a one-size-fits-all approach is risky in the long run.

Banks and fintechs need to be active participants in how they manage their compliance and own their compliance framework. If not, it can have serious consequences. We’ve already seen regulators take action against what they deem risky behavior in the recent actions taken by the OCC with Blue Ridge Bank and their impending customer partnerships.

Treasury Prime approaches compliance differently than other BaaS providers. Instead of absorbing all compliance responsibilities, we empower our fintech and enterprise partners to stand up their own compliance programs, setting them up for responsible innovation in the long-term.

“​​We won’t do it for you, but we’ll do it with you.” Treasury Prime Associate General Counsel and Vice President of Compliance Sheetal Parikh said. “We’ll give you the tools to support you through your compliance journey. Other providers view compliance as a checkbox, a one-time endeavor. We want to build a long-standing relationship where we have our compliance team and our customer success team supporting the fintech throughout.”

Learn more about compliance and what it means to innovate in today’s regulatory landscape in our recent webinar. And if you’re attending Money 20/20, register for Activate, our inaugural conference, to learn from experts about compliance and what it means for your business.

3. Crypto remains cryptic:

Earlier this year, President Biden signed an executive order ensuring the “responsible development of digital assets”.

While the order aims to protect consumers amid the explosive growth of digital assets like crypto, it hasn’t necessarily defined what those policies will specifically look like and what federal body would be responsible for creating and enforcing those policies. Even the Pentagon is looking into the possible threats that crypto poses.  Adding to the complexity are the other goals of the executive order, such as exploring the implications of climate change as well as financial inclusion and equity.

The Takeaway: As with the OCC, crypto experts predict governmental bodies like the Securities and Exchange Commission and Commodity Futures Trading Commission will continue to put a magnifying glass up to the digital asset space and advocate for more proactive policy creation and enforcement.

We’ve already seen the SEC sue big crypto players like Ripple — and with California’s newly signed “Digital Financial Assets Law”, crypto companies (like Ripple and Coinbase) would have to register a license with the state’s Department of Financial Protection and Innovation, a move critics see as counterproductive to the state’s crypto adoption and innovation.

It’s clear that while being an active participant in your compliance is crucial for any fintech or enterprise, it may be especially important for those dealing with digital assets. Finding support through a business-aligned banking partner could be more vital than ever as both state and federal governmental bodies continue to zero in on crypto. 

Treasury Prime has the largest bank network of any banking as a service provider, partnering with banks that work with crypto and digital asset businesses. Contact us to learn more.

4. Bank deposits take a hit:

U.S. bank deposits saw a $370 billion dip the second quarter of this year, the first time that this has happened since 2018. According to a September report by the Federal Deposit Insurance Corporation, deposits fell to $19.563 trillion as of June 30, down from $19.932 trillion in March.

While it sounds stark, it’s not all bad news as banks reported stronger loan balances, increased net interest income, as well as good credit quality. The report goes on to explain that the net loss of deposits is due to “the increase in provision expense — the amount set aside by institutions to protect against future credit losses”, a signal that banks are recognizing the threat of their profitability due to geopolitical and pandemic-related issues alongside inflation and rising interest rates.

The Takeaway: In last month’s The Takeaway, we shared that the number of bank branches is on a steep decline as customer behavior shifts, banks merge, and fewer chartered banks open.

Experts say that improved technology or partnering with the right tech provider could be the key to survival for the next generation of banking. As we’ve explained above, banks — particularly smaller community banks — could use banking as a service as not only a route to profitability but a way to survive and protect itself from the rippling repercussions of today’s geopolitical and economic environment.

5. CFPB is onto BNPL:

Similar to crypto, buy-now-pay-later is drawing scrutiny, possibly pushed into the spotlight thanks to Apple’s announcement of its own BNPL offering. And as with crypto, the regulators are taking a closer look.

The Consumer Financial Protection Bureau has concerns over how data from BNPL customers will be used — and possibly abused — to push consumers to only buy from specific brands and be encouraged to go into constant BNPL buying cycles which can over-extend credit. The CFPB also expressed concerns about how transparent BNPL terms are. While industry insiders say an overwhelming majority of their customers report understanding the fine print, the CFPB isn’t so convinced.

The CFPB hasn’t provided specific next steps in terms of policy and procedure, but said that they are working on solidifying upcoming guidance and rules.

The Takeaway: BNPL finds itself in the crosshairs of regulators just as BaaS and crypto have as well. While BNPL is arguably a financial product that meets customers where they are and provides another avenue for end-users to more easily buy products and spend their money, BNPL providers still need to keep a pulse on evolving compliance measures.

Even if rules and regulations have not yet taken shape, the fintechs and enterprises who invest in their own compliance framework now are best prepared for what’s to come next, whatever that may look like.

Did we miss anything? What news should we know about? Let us know by contacting us or sending us a DM.

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