This year we celebrated the 248th birthday of the United States and Cross River Bank's 16th anniversary. For me, they go hand in hand.
The profound democratic ideals that form the bedrock of this nation compelled me to move from my native France to the United States over three decades ago. Arriving with 90 days of cash in hand in search of adventure on Wall Street, I learned that financial services were out of reach for a new immigrant: Opening a bank account, renting an apartment or getting a credit card were almost impossible. It was even worse for low- or moderate-income Americans, and worse yet for people of color. Today, through innovation, those same Americans have far greater access to financial services and products, most delivered by providers who did not exist when I arrived in the U.S. But the journey of financial inclusion for all is nowhere near complete.
The emergence of fintech has been massively positive for the U.S. Fintechs have been the sources of innovation the banking industry sorely needed. They have enhanced competition and awoken incumbent banks from decades of complacency, returning some, but not all, to being customer-centric. They have found ways of bringing products to people traditionally excluded from the marketplace, and doing so with care, fairness and integrity. Many have succeeded handsomely, and, as with all innovation, some have failed. A few compliance issues have been raised over the years, yet they have been small, with limited customer impact, and have been rapidly remediated. Over the years, issues have frequently arisen where the innovativeness of a fintech's approach has challenged a lack of regulatory clarity, or worse, regulations that have not advanced at the pace of technological development.
Almost all fintechs require a bank as a partner. Alas, we believe the future of fintech and the banks that serve fintech communities is today in peril.
Of the roughly 4,800 banks in the U.S., fewer than 100 provide banking as a service, or BaaS, to fintech partners. Of those, about 20 are very active, a dozen or so of which are key players in the BaaS ecosystem. Of the 12 such banks, 11 (including Cross River) have been subject to consent orders and enforcement actions by their regulators since September 2022. Those numbers are concerning on both policy and practical levels. Does this mean that the bank-fintech partnership model is broken and nonviable? We firmly believe the opposite, that the bank-fintech model is absolutely viable, but it is wrestling with a broken regulatory model.
The CEO and Co-founder of NovoPayment is one of American Banker's 2024 Most Influential Women in Fintech.
From a supervisory perspective, there is little banks can disclose publicly about the underlying facts of a consent order. A high-level survey of recent consent orders shows some commonality: (a) an alleged compliance issue with a fintech that may be neither widespread nor systemic rises to regulator's attention; (b) whether or not alleged consumer harm actually exists, the regulator inevitably "wins" the argument against the bank based on inherent power; (c) the ensuing consent order imposes limits on banks' future business and affects every fintech in these banks' respective portfolio, potentially requiring banks to offload fintech partners who subsequently struggle to find other bank partners, affecting millions of consumers. The chilling effect reverberates through the entire banking industry and the message other banks receive is "don't innovate."
Why does it matter? Because innovation is what distinguishes the U.S. from a myriad of other developed nations. Innovation has fueled the American economy and has allowed millions of Americans to access financial products and services.
Responsible bank-fintech partnerships have made a meaningful difference in the lives of many Americans who might not otherwise have access to credit or banking services. Those with an absolute commitment to compliance and safety and soundness are relentlessly striving to uphold the highest standard, while working to address the ever-growing complexity and breadth of a responsible bank-fintech partnership business model.
If BaaS as a business model is unable to survive, the financial lifelines consumers have accessed through fintech face an existential threat. Innovation thrives in a society that values dialogue, education and openness. Consumers benefit from an array of choices in financial products and offerings, and with market forces at work to drive competition. America must never cease to be the global leader in innovation and entrepreneurship. However, politics and misguided regulatory forces threaten the very foundation of that innovative spirit and limit consumer choice.
