Banking fintechs as a service navigate regulation | PYMNTS.com

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In a policy letter that was part announcement and part warning, the Consumer Financial Protection Bureau (CFPB) warned FinTechs in April, with CFPB Director Rohit Chopra saying that a provision little-used Dodd-Frank Act is now being used to take a closer look at non-banks.

“Given the rapid growth of consumer offerings by non-banks, the CFPB is now using dormant authority to compel non-banks to meet the same standards as banks,” Chopra wrote in the notice. This authority gives us critical agility to act as quickly as the market, allowing us to conduct reviews of financial companies posing risks to consumers and stop the damage before it spreads.

In a conversation with PYMNTS, Treasury bounty Associate Legal Counsel and Vice President of Compliance Solutions Parikh Leaf discussed the impact of these recent trends: “We are seeing a lot more regulatory activism where we have the OCC [Office of the Comptroller of the Currency]the CFPB and many state banking departments that have come out and said maybe we need to look at this a little closer.

Why the crackdown now after years of unregulated FinTech activity? Parikh said the increasing market share of FinTechs and non-banks, combined with pandemic disruptions in the use of banks and traditional financial institutions (FIs), is now too big a trend to ignore. And that has precipitated regulatory action as banking-as-a-service (BaaS) platforms like Treasury Prime sink further into the market, fueling financial solutions for non-banks.

So far, some FinTechs and non-banks have bypassed regulators, taking advantage of regulated FIs’ banking licenses and letting them hold the bag on regulatory exposure.

It remains to be seen how this affects BaaS companies like Treasury Prime – which provide a technology layer and APIs for FinTechs to connect to outdated banking technology cores to enable integrated financial experiences. No matter how regulations change, Parikh says there’s an opportunity for FinTechs, banks and BaaS companies to work together to get it right. This can be done by creating compliance programs that uphold the law and set up both FinTechs and partner banks for flexibility and long-term growth.

See also: The Key to Banking as a Service to Accelerate Embedded Finance for FIs

Culture shock

Wondering what a regulated FinTech landscape would look like, she said, “We’ve been thinking a lot and watching how these trends evolve. I think the question is, as FinTechs start to have more users and their customer base grows, what role should they play? »

She said it’s a “natural inclination” for FinTechs that have operated for years without this oversight to back down from a new focus on compliance, because it’s not exactly familiar territory for run start-ups. by software engineers who do not have in-depth knowledge. benches of experienced financial and banking executives.

This is largely what the CFPB finds problematic, as they are essentially tech companies that go where the money is and behave like banks.

Parikh told PYMNTS that in an industry so highly regulated after Dodd-Frank and given the meteoric growth in the use of FinTech and financial apps since 2020 alone, “[FinTechs] cannot get away with having no insight into or role in the management of their regulatory framework. If there is an ACH that is not processed, FinTechs should be the first point of contact for end users.

Noting that the FDIC was formed during the Great Depression of the 1930s, she added, “We’re trying to figure out how these bodies of laws and regulations apply to this new technology and this new space, where you have different players playing different roles. How do we apply the universe of laws and regulations to this growing and changing landscape? »

See also: How “invisible” technology is revolutionizing America’s banking system

speak both languages

Going back to the ACH example, The Clearinghouse (TCH) raised ACH one-day limits to $1 million earlier this year. As a key FinTech offering, ACH brings non-bank entities into the circle of risk compliance.

Parikh said, “If you’re offering a product like ACH, you’re dealing with people’s money and data, which in this environment are probably two of the most important regulated elements of someone’s identity. There’s a lot of pressure on FinTech to have some kind of fraud and risk management platforms to figure out, are these users who they say they are? »

The know-your-customer aspect of FinTech and non-bank regulation sits at the intersection of compliance and commerce in 2022, and players are still figuring out how to allocate risk and liability, though ‘it seems clear that the unregulated days are quickly ending.

BaaS providers like Treasury Prime that connect FinTechs and banks through API software see an opportunity in regulatory change, as Parikh noted that it’s becoming a technology catalyst to ride what looks like an impending wave of regulation.

“We like to think that we help FinTechs and partner banking better,” she said. “We speak both languages ​​and we understand the pressures that FinTechs are under and their forte from a technology perspective and then all the regulatory pressure that banks are facing. It’s really about having a purpose on how to create tools and processes to help FinTech and banking take full advantage of this synergy.

Now is an optimal time to tap into such expertise, as she said CFPB and “the OCC, and many state banking departments are investing in innovation offices so they can better understand how to regulate this space. It is clear that FinTechs are not going to disappear and should not disappear. But there is quite a bit of education for all sorts of traditional financial institutions to really grow.

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