Fintechs need to be proactive in setting industry standards

In the last decade several fintechs achieved unicorn status Partnerships with banks.

These partnerships are now in jeopardy. Along with innovation and customer choice.

Bank partnerships, once a niche concept, have become one of the most important innovations in financial services. Banks provide regulatory licenses and hold deposits, while their partners provide technology and distribution. They promote competition and consumer choice, and they give Community banks a path to business growth.

If companies want to continue working with banks to build innovative financial services, they must stop viewing regulation as a problem for their partner banks and instead be part of the solution. They must develop standards that clearly define robust risk management and regulatory compliance. They must be assessed by independent third parties and hold themselves (and each other) accountable. You have to get involved in the regulatory structure.

The rapid growth of banking partnerships in recent years has rightly attracted the attention of regulators. Current events, such as the Synapse bankruptcydrew attention to the potential harm to consumers if these partnerships go wrong. Fundamentally, they raise broader questions about the safety and soundness of a financial system that is increasingly dispersed across partners that are not themselves regulated as banks.

Regulators are responding to their alarm. In the first half of 2024, federal banking agencies – the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. – Formal enforcement actions filed, almost 24% of which were received by partner banks with non-banks.

The message is clear: consumer protection must be unassailable. The safety and soundness of our banking system is crucial.

At the same time, we must not allow our fear to undermine consumers' need for competition and choice. Almost 20 years ago, I opened my first bank account with Washington Mutual. JPMorgan Chase took it over. A few years later, I moved to First Republic Bank – they took on a mortgage for me that JPMorgan Chase wouldn't take on. With the acquisition of First Republic last year, I am once again a customer of JPMorgan Chase. A few weeks ago, JPMorgan Chase boldly announced that they could charge fees for basic banking services.

When I looked for community banks in the area, I found that many had closed. Digital-first products developed by companies that work with banks offer some of the best alternatives. It's not surprising three out of five consumers and Generation Z Millennials If you have your primary checking account at a digital bank, you have that account with Chime, PayPal or Cash App – all of which use banking partnerships.

As community banks face increasing pressure from major banks, which are now larger than ever before, these collaborations provide a lifeline. The impact is clear: banks that entered into partnerships experienced average sequential deposit growth of 2.2% in the second quarter of 2023, while other US banks with assets under $10 billion saw a decline of 0.8%.

Regulators have made it clear that they will hold these banks accountable for their partners. But this model will fail if we only focus on the role of banks in overseeing fintechs – their partners must support the ecosystem by formalizing compliance and risk management standards under which they operate.

It’s time for these fintech partners to step up.

Companies working with banks need to take a more proactive role in standardizing risk management expectations. They need to translate their innovative business models into terms that are easy to understand for both their partner banks and regulators.

As the founder and CEO of a company that works with a bank, I know how important it is for banking partners to take on more responsibility. It's the same philosophy we adopted at my previous fintech company – we knew early on that lifting some of the burdens around compliance and security at banks would be critical to the long-term viability of open banking.

The financial services industry is at a crossroads. Banking partnerships offer the path to a more competitive and innovative future. However, this future depends on the willingness of partners to work together as an industry and set standards for compliance, risk management and certification in addition to regular audits. Even if these companies are not banks themselves, they increasingly represent an extension of financial services and must support their banking partners in certifying compliance rigor.

Otherwise, the partnerships that are a lifeline for banks and consumers today could inadvertently break the back of the very community banks they seek to help tomorrow.