As Banking as a Service continues to grow, banks face mounting challenges around compliance, risk management, and regulatory shifts. The rise of fintech partnerships has transformed the landscape for smaller banks, pushing them to adapt to new compliance expectations and rethink their strategies.

In a recent conversation, Natasha Vernier, CEO of Cable, and Konrad Alt, Managing Partner at Klaros Advisors, explored how banks can address these challenges. Their discussion touched on essential topics such as managing compliance risk, learning from consent orders, embracing automation and AI, and cultivating a proactive compliance culture.

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1. Compliance Challenges for Smaller BaaS Banks‍

Smaller banks entering the Banking as a Service space face a unique set of challenges compared to larger institutions. Without the same level of resources, these banks must find efficient ways to manage compliance without relying on massive manual labor or large teams. One solution lies in leveraging automation and AI to streamline compliance processes such as automated compliance testing. These technologies allow banks to reduce the burden of manual audits and reviews while keeping up with increasingly stringent regulatory requirements.

However, these challenges go beyond technology. The shift from traditional community banking to BaaS brings a whole new set of risks. Banks that once focused on branch-based customer service are now navigating the complexities of supporting fintech partnerships. This transformation requires a complete overhaul of compliance programs, as the traditional structures can no longer accommodate the operational risks tied to fintech.

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Key Takeaway:

For BaaS banks, staying nimble and relying on technology is key to managing compliance effectively as regulatory demands increase. The transition from traditional banking to BaaS requires an overhaul of compliance processes and a proactive mindset.

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2. Shifting from Community Banking to BaaS

Transitioning from a traditional community bank to a BaaS provider requires more than just adjusting compliance frameworks. The nature of the risks changes drastically, especially when dealing with fintech partners. These partnerships introduce operational risks that many community banks have never dealt with before.

To successfully manage these risks, banks need to strengthen their board oversight and risk governance systems. A robust risk management framework, supported by strong board involvement, is key to navigating these challenges. The leadership teams in these banks must understand the evolving nature of risk in the BaaS space and adapt their strategies accordingly. Without these changes, community banks risk falling behind in both operational effectiveness and compliance.

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Key Takeaway:

The shift from community banking to BaaS requires significant changes to a bank’s risk governance and board oversight. Without this transformation, banks may struggle to manage the operational risks and regulatory expectations that come with working in the fintech space.

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3. Lessons from Consent Orders and Regulatory Expectations

‍Recent consent orders highlight some common compliance gaps, particularly in BSA/AML compliance and board oversight. These orders provide banks with valuable insights into where they can improve. By analyzing these orders, banks can proactively address compliance gaps before they become issues.

‍One recurring theme in these consent orders is the need for independent effectiveness testing. Many banks fail to implement adequate measures for testing the effectiveness of their compliance programs, which often leads to regulatory scrutiny. Additionally, reconciliation, though not frequently highlighted in consent orders, has been a root cause of major compliance failures. Understanding and addressing these gaps can help banks avoid similar pitfalls.

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Key Takeaway:

Consent orders are a treasure trove of lessons for banks operating in the BaaS space. By understanding common failures in BSA/AML compliance and board oversight, banks can proactively address these areas before they face regulatory scrutiny.

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4. Adapting to Regulatory Changes with Technology

‍With regulatory changes continually reshaping the landscape, banks must adapt quickly to stay compliant. Automation and AI are becoming essential tools in managing compliance, particularly for tasks such as transaction monitoring and customer onboarding. These technologies help banks manage the complexity of compliance while reducing the need for manual intervention.

As regulators push banks to take on more responsibility for compliance functions that were previously outsourced to fintech partners, banks need to bring these tasks in-house. This gives banks more control over their risk management processes but also requires investment in technology and expertise. Automation offers a way to manage these compliance tasks effectively while staying within budget constraints.

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Key Takeaway:

AI and automation are critical tools for helping banks manage the growing complexity of compliance. As banks bring more compliance functions in-house, automation can streamline processes like transaction monitoring and reduce the burden of manual oversight.

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5. Building a Proactive Compliance Culture

‍Creating a proactive compliance culture is essential for any bank looking to succeed in the BaaS space. Instead of waiting for regulatory issues to arise, banks should focus on building compliance into their everyday operations. This not only helps reduce the risk of regulatory penalties but also creates a foundation for long-term growth.

At the core of a proactive compliance culture is strong board oversight. The board must prioritize compliance, understanding the risks involved in fintech partnerships, and ensure that these risks are managed properly. Integrating compliance into the strategic vision of the bank helps create a more resilient institution, one that can thrive in a fast-changing regulatory environment.
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Key Takeaway:

A proactive compliance culture is essential for long-term success. Banks that fail to prioritize compliance at the board level will struggle to compete and may face increased regulatory scrutiny.

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Conclusion

Banks in the Banking as a Service space face growing regulatory challenges. To succeed, they must adopt new technologies, learn from industry trends, and build compliance into their core operations. By managing risk proactively, analyzing consent orders, and integrating automation into compliance processes, banks can stay ahead of the curve.

To explore these topics in more detail, watch the full video conversation between Natasha Vernier and Konrad Alt.

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For more information on how Cable can automate your compliance test, contact Cable today for a demo.