Banking as a Service Regulation: 5 Steps to Help Mitigate Risk and Compliance Issues


Banking as a Service Regulation: 5 Steps to Help Mitigate Risk and Compliance Issues

Financial services institutions in the US face a regulatory landscape that is massive and complicated. Early stage (and even established) FinTechs find it challenging to navigate the regulations and rules set out by federal and state authorities that often vary from state to state.

As a regulated bank, your organization is uniquely positioned to help FinTechs offer financial service products to their end users. Working in partnership, you can share your risk management and compliance know-how via an innovative model known as Banking as a Service (BaaS).

Banking as a Service helps FinTechs leverage a partner bank’s chartered capabilities, infrastructure, and banking / regulatory expertise, while the bank benefits from the FinTech’s innovative products, technology, and ability to reach previously underserved communities.

Still, a bank that teams up with a FinTech in a BaaS arrangement bears ultimate accountability for its FinTech partners’ compliance and risk management — and for the penalties, fines, and other measures that regulators take in the discovery of non-compliant activity or risks that are not well controlled.

For community banks, this can result in embarrassing public relations issues when a partner FinTech company is deemed to be non-compliant. Examples include FinTechs calling themselves “banks” or a FinTech unable to meet its obligations to end customers.

As with any innovation in financial services, there are unique regulatory considerations for a banking as a service partnership between a bank and FinTech. Banks and FinTechs must ensure conformity with the established obligations of federal and state banking laws and both be on the same page about Banking as a Service regulations. In this post, we’ll examine five steps banks can take to help ensure a stress-free business relationship with FinTech partners and regulators.

1. Build Banking as a Service partnerships with risk and compliance in mind

Before you sign on the dotted line, be sure to work on a detailed overview of responsibilities with all potential partners to ensure everyone is on the same page relative to risk management and compliance. This oversight should cover aspects including (but not limited to):

  • Customer onboarding
  • Transactions monitoring and potential fraud
  • Marketing activities and advertising claims
  • Customer disclosures including data privacy
  • Consumer complaints and payments disputes
  • Third-party and “fourth-party” due diligence

Even the BaaS contract between your institution and a partner FinTech must address regulatory expectations, so avoid cutting corners. This is an important first step in building a partnership that will facilitate effective communication and growth for both parties.

2. Watch for Banking as a Service regulation changes that could affect you

By early 2021, there were more than 10,000 FinTech startups in the US. Regulators, such as the OCC, continue to closely monitor the industry’s growth and evolution. It is critical that banks and partner FinTechs stay abreast of changing regulations and compliance requirements, both general requirements and specific Banking as a Service regulations.

Regulatory agencies recently proposed updated guidance on third-party financial relationships that offers some insight into how regulators view bank-FinTech partnerships. Regulators recognize that these relationships are crucial for banks looking to innovate. But these relationships also increase risk in areas where banks lose direct control over customer-facing activities.

It’s vital that banks stay current with the evolving regulatory landscape and industry developments that affect partner relationships with FinTechs and the products or services they offer.

3. Continually review risk management

Technology roadmaps stretch well into the future. The products and services your partner FinTech offers when they sign an agreement with your bank are often the first steps in a long journey.

Both partners should regularly review product roadmaps and technology plans to understand how the relationship will advance and evolve — and what that will mean for regulatory compliance.

Regularly examine developments that could affect your Banking as a Service relationship:

  • Are there any new Banking as a Service regulations or compliance requirements on the horizon that could change your BaaS partnership?
  • Will upcoming features of the FinTech offering necessitate new controls?
  • Should additional processes and workflows be established between the bank and FinTech?
  • What responsibility will each partner take to ensure they are prepared for risk and compliance issues raised by new technology?

4. Actively engage with regulators

Regulators face a continual learning curve as they work to keep pace with developing technology — just like banks and FinTechs must keep updating themselves on risk management and compliance-related rules and regulations as they evolve.

Whenever possible, work collaboratively with regulatory bodies. Provide as much insight into the services and products you plan to offer in conjunction with FinTechs. Share how the bank will provide risk oversight of the partnership and continue to meet regulatory requirements via updated controls, expertise, and technology solutions. Open, and transparent dialogue will allow regulators to provide important, ongoing feedback and guidance as the bank builds out its Banking as a Service relationships.

5. Automate compliance workflows to avoid errors

One of the biggest challenges Banking as a Service relationships face is the time-consuming manual workflows required to ensure appropriate regulatory compliance and risk management, including:

  • FBO reconciliation
  • ACH transfers
  • Anti-money laundering (AML)
  • Know your customer (KYC)
  • Encryption and security
  • Vulnerability and penetration testing
  • Data access and reporting

Many banks choose to implement third-party solutions to streamline these operations and lighten their load. By automating oversight of FinTech activity and customer transactions, your institution ensures any risk and compliance issues are rapidly detected and corrected.

Synctera simplifies Banking-as-a-Service

The Synctera platform makes Banking as a Service relationships simple, reducing the regulatory risk for banks and FinTechs. Our automated, managed platform tracks every FinTech transaction and offers full transparency into significant activities — generating an auditable log that helps banks comply with regulatory standards.

Whether your institution is just starting to explore FinTech partnerships and BaaS or you’ve already established a program to work with innovative partners, Synctera can help. Contact us today.

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