Third-party guidance could have ‘chilling effect’ on BaaS, former FDIC chair warns
Former FDIC Chair Jelena McWilliams raises concerns about the impact of new third-party guidance on bank-fintech partnerships.
Former Federal Deposit Insurance Corp. (FDIC) Chair Jelena McWilliams has expressed her concerns regarding the potential “chilling effect” of the recently released third-party guidance on banking-as-a-service (BaaS) and bank-fintech partnerships. McWilliams shared her thoughts during a fireside chat at the American Fintech Council’s Policy Summit in Washington, D.C. She believes that the current set of regulators may not want BaaS and third-party partnerships to flourish, despite the inability to explicitly prohibit such partnerships.
The FDIC, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve issued guidance in June on how financial institutions should approach third-party relationships, including collaborations with fintech firms. However, McWilliams argues that the guidance lacks the necessary information and clarity to define the parameters of these partnerships. Without clear guidelines, banks may be hesitant to engage in such collaborations, which could potentially hinder the growth of BaaS and limit opportunities for smaller community banks to stay viable.
Regulators’ guidance falls short, warns McWilliams
McWilliams points out that although the guidance provides general information, it fails to clearly define the boundaries for banks. She states, “When you read the guidance, it says a lot, but it doesn’t say anything to really help you understand if I cross the line, where is that line?” According to McWilliams, banks need a clear framework on how to comply, as the lack of specific guidelines could deter them from entering partnerships with fintechs or pursuing BaaS. This lack of clarity and guidance could have a “chilling effect” on the industry.
Fed Governor Michelle Bowman, the only Fed member to oppose the finalization of the guidance, also highlighted the lack of clarity, particularly for smaller institutions. According to Bowman, the guidance does not provide the necessary clarity or supplemental tools to facilitate the implementation of third-party risk management frameworks in smaller banks.
Potential impact on BaaS partnerships
The lack of clarity surrounding the guidance could discourage banks from entering into partnerships with fintechs or pursuing BaaS, which could have a significant impact on the financial industry. BaaS has become increasingly popular among smaller community banks as a strategy to stay competitive. By partnering with fintech firms, these banks can offer innovative digital services to their customers without having to develop the technology in-house. However, the uncertain regulatory landscape might make banks more hesitant to engage in such partnerships, potentially limiting their ability to adapt and innovate.
Consent orders and their implications
McWilliams also commented on the recent consent orders issued by regulators to several large BaaS players. She discussed the Office of the Comptroller of the Currency’s order to Blue Ridge Bank to improve its oversight of third-party fintech partnerships. The FDIC also imposed an enforcement action on Cross River, another BaaS-focused firm, for violations related to fair lending laws and regulations.
These consent orders indicate that regulators are closely monitoring banks engaged in third-party partnerships and are looking for compliance with regulations such as the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. McWilliams suggests that these recent enforcement actions send a clear message that regulators are closely scrutinizing banks’ every move. This increased scrutiny could make banks more hesitant to engage in partnerships due to the potential risks associated with BSA and AML compliance.
Finding the balance between compliance and financial inclusion
McWilliams expressed empathy for banks faced with the challenge of balancing compliance and risk management with efforts to serve unbanked and underbanked consumers. She highlighted the difficulty of onboarding consumers with limited financial histories and the higher risks involved. McWilliams believes that making it harder for these communities to access banking services contradicts the goal of bridging the income and wealth gap.
McWilliams also raises questions about the intentions of those who advocate for financial inclusion but hinder the onboarding of low- and moderate-income communities. She suggests that regulators should develop programs to help banks and fintechs onboard these consumers effectively, rather than creating additional barriers.
Key Takeaways
- The new third-party guidance released by regulators has raised concerns about its potential chilling effect on BaaS and bank-fintech partnerships.
- The guidance lacks clarity and specific guidelines, making it difficult for banks to understand and comply with the parameters of third-party partnerships.
- This lack of clarity could hinder the growth of BaaS and limit opportunities for smaller community banks to stay viable.
- Recent consent orders and enforcement actions indicate heightened scrutiny from regulators, potentially making banks more hesitant to engage in partnerships.
- Banks face the challenge of balancing compliance and risk management with efforts to serve unbanked and underbanked consumers, hindering financial inclusion.
Frequently Asked Questions
What is BaaS (Banking-as-a-Service)?
BaaS refers to the practice of banks partnering with fintech firms to offer their customers innovative digital services without developing the technology in-house. This partnership allows banks to leverage fintech expertise and deliver a seamless and enhanced banking experience to their customers.
What is the recent guidance issued by regulators?
Regulators, including the FDIC, OCC, and Federal Reserve, released guidance for financial institutions on how to approach third-party relationships, including partnerships with fintech firms. The guidance aims to provide a framework for managing risks associated with these partnerships, but there have been concerns about its lack of clarity.
Why is the lack of clarity in the guidance problematic?
The lack of clarity in the guidance makes it difficult for banks to understand the boundaries and requirements for third-party partnerships. Without clear guidelines, banks may be hesitant to engage in such partnerships, potentially hindering the growth of BaaS and limiting opportunities for community banks to innovate and stay competitive.
What are the concerns raised by former FDIC Chair Jelena McWilliams?
McWilliams is concerned that the current regulators may not want BaaS and third-party partnerships to flourish, as indicated by the lack of specific guidelines in the guidance. She believes this lack of clarity could have a chilling effect on the industry and hinder the ability of banks to adapt, innovate, and serve unbanked and underbanked consumers.
What are the potential implications of the recent consent orders?
The consent orders indicate increased scrutiny from regulators, particularly regarding compliance with regulations such as the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. This increased scrutiny could make banks more hesitant to engage in partnerships due to the potential risks associated with BSA and AML compliance.
How can banks balance compliance and financial inclusion?
Banks face the challenge of balancing compliance and risk management with efforts to serve unbanked and underbanked consumers. Striking the right balance requires developing programs and providing support to banks and fintechs in effectively onboarding these consumers, facilitating financial inclusion while ensuring compliance with regulations.
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