Cable co-founder and Chief Product Officer, Katie Savitz, delivered a Masterclass at the 2023 Empire Fintech Conference about Banking-as-a-Service, compliance, and the latest technology solutions, with Jason Mikula of Fintech Business Weekly.
This post summarizes the topics covered in the Masterclass, and you can download the presentation below or listen to a recording here.
The U.S. banking system is experiencing its greatest stress since the 2008 Great Financial Crisis and regulators are seeking to address risks being revealed. BaaS may make the banking system more resilient, but it also introduces new risks. Six recent developments shed light on how BaaS may evolve going forward.
Increasingly, growth and innovation in the banking industry is happening outside the banking regulatory perimeter and, for BaaS-focused banks, asset size is no longer a good reflection of risk.
With the sector’s growth now attracting more regulatory attention, to survive, all stakeholders need to adapt.
The era of banks onboarding fintechs with little to no insights is finished.
For bank-fintech partnerships to be sustainable, they must be done in compliance with regulatory requirements. While the knee-jerk response is to throw bodies at the problem, this not only is an expense, but also has scalability limitations. Instead, a new approach enabled by new technology is needed to make these partnerships not only possible, but profitable.
Rapid customer growth and disaggregated responsibilities are primary drivers of compliance breakdowns. Both factors are especially prevalent in BaaS.
In BaaS, compliance teams used to managing one institution and their own direct customer pool now have to deal with multiple fintechs, each with their own controls and indirect customer pools.
This demands a whole new level of compliance capabilities. Many banking providers still rely on legacy systems and manual processes, but those are no longer fit for purpose.
As a result, regulators are already focused on this question for bank-fintech relationships: Who is responsible for what when things break?
Over the last decade in BSA/AML compliance, banks and fintechs have added more controls, with little idea about how effective they are. Over $270 billion is spent worldwide each year on financial crime compliance, with the majority of that spent on people.
Despite this spending, less than 5% of accounts are tested to understand effectiveness. If banks can't even be sure how effective their own controls are, how can they do that for their fintechs?
But this same exact approach is being used in BaaS – partner banks are adding more fintechs with little idea how effective their controls are, even as the compliance challenges multiply.
Increasingly, regulatory pressure is demanding that you be able to “show, not tell” that your program is effective.
Compliance teams need to ask: What part of your tech stack helps you answer questions about effectiveness?
In BaaS, technology solutions for oversight, monitoring, and assurance are essential. For banks, how do you know everything is working at all levels across their fintechs? And for fintechs, how do you reassure bank partners everything is fine?
The first key compliance task in BaaS is understanding risk better: banks’ own risk, fintechs’ risk, and how fintech risk impacts banks’ risk. Below are practical tips and steps to achieve this:
The second main compliance task in BaaS is oversight and monitoring of controls. Below are practical tips and steps to improve these processes:
BaaS is here to stay, but operational work will overwhelm banks and fintechs unless automated effectiveness testing becomes commonplace. Partner banks need to deeply understand their requirements and deploy technology solutions to enjoy the trifecta of full compliance, resource efficiency, and fast onboarding to grow their fintech programs.
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Navigating Compliance and Regulatory Trends in Banking as a Service: Key Insights from Natasha Vernier and Konrad AltCable co-founder and Chief Product Officer, Katie Savitz, delivered a Masterclass at the 2023 Empire Fintech Conference about Banking-as-a-Service, compliance, and the latest technology solutions, with Jason Mikula of Fintech Business Weekly.
This post summarizes the topics covered in the Masterclass, and you can download the presentation below or listen to a recording here.
The U.S. banking system is experiencing its greatest stress since the 2008 Great Financial Crisis and regulators are seeking to address risks being revealed. BaaS may make the banking system more resilient, but it also introduces new risks. Six recent developments shed light on how BaaS may evolve going forward.
Increasingly, growth and innovation in the banking industry is happening outside the banking regulatory perimeter and, for BaaS-focused banks, asset size is no longer a good reflection of risk.
With the sector’s growth now attracting more regulatory attention, to survive, all stakeholders need to adapt.
The era of banks onboarding fintechs with little to no insights is finished.
For bank-fintech partnerships to be sustainable, they must be done in compliance with regulatory requirements. While the knee-jerk response is to throw bodies at the problem, this not only is an expense, but also has scalability limitations. Instead, a new approach enabled by new technology is needed to make these partnerships not only possible, but profitable.
Rapid customer growth and disaggregated responsibilities are primary drivers of compliance breakdowns. Both factors are especially prevalent in BaaS.
In BaaS, compliance teams used to managing one institution and their own direct customer pool now have to deal with multiple fintechs, each with their own controls and indirect customer pools.
This demands a whole new level of compliance capabilities. Many banking providers still rely on legacy systems and manual processes, but those are no longer fit for purpose.
As a result, regulators are already focused on this question for bank-fintech relationships: Who is responsible for what when things break?
Over the last decade in BSA/AML compliance, banks and fintechs have added more controls, with little idea about how effective they are. Over $270 billion is spent worldwide each year on financial crime compliance, with the majority of that spent on people.
Despite this spending, less than 5% of accounts are tested to understand effectiveness. If banks can't even be sure how effective their own controls are, how can they do that for their fintechs?
But this same exact approach is being used in BaaS – partner banks are adding more fintechs with little idea how effective their controls are, even as the compliance challenges multiply.
Increasingly, regulatory pressure is demanding that you be able to “show, not tell” that your program is effective.
Compliance teams need to ask: What part of your tech stack helps you answer questions about effectiveness?
In BaaS, technology solutions for oversight, monitoring, and assurance are essential. For banks, how do you know everything is working at all levels across their fintechs? And for fintechs, how do you reassure bank partners everything is fine?
The first key compliance task in BaaS is understanding risk better: banks’ own risk, fintechs’ risk, and how fintech risk impacts banks’ risk. Below are practical tips and steps to achieve this:
The second main compliance task in BaaS is oversight and monitoring of controls. Below are practical tips and steps to improve these processes:
BaaS is here to stay, but operational work will overwhelm banks and fintechs unless automated effectiveness testing becomes commonplace. Partner banks need to deeply understand their requirements and deploy technology solutions to enjoy the trifecta of full compliance, resource efficiency, and fast onboarding to grow their fintech programs.
