Collaboration and Innovation Amid Regulatory Challenges — William “Bill” Jones
The fintech industry’s trajectory over the past decade has been nothing short of remarkable. With record-breaking capital raises and exponential growth in venture capital funding, fintechs have reshaped the financial landscape and revolutionized the way we conduct transactions and manage money. Despite recent regulatory challenges and market corrections, the future outlook remains promising. In the Financial Brand article titled What Banks & Fintechs Must Know About Washington’s New Guidance on Partnerships, the guidance from federal banking regulators serves as a wakeup call for banks and fintech companies to embrace more proactive approaches to managing third-party relationships and regulatory compliance. In this case, being proactive isn’t just advisable, it’s essential.
Here’s a breakdown of the regulatory changes highlighted in the original article:
Principles-Based Approach
The guidance takes a principle-based approach, emphasizing the importance of banks assessing the risks of all third-party relationships and conducting appropriate due diligence and oversight based on that risk assessment.
Final Guidance on Third-Party Relationships
The Federal Reserve, the Comptroller’s Office, and the Federal Deposit Insurance Corp. issued final guidance on managing risks associated with third-party relationships, supplanting prior guidance.
No Lesser Regulatory Burden for Smaller Banks
Smaller banks remain responsible for managing third-party relationships in compliance with regulations.
Responsibility for Regulatory Compliance
Banks must ensure compliance with applicable laws and regulations, even when activities are outsourced to third parties. Contracts must specify compliance obligations and allow for monitoring of third-party compliance.
In response to this guidance, boards at fintech firms and banks are taking decisive action. They are recognizing the critical role they play in overseeing regulatory compliance and risk management strategies. Rather than being deterred, boards should view regulatory engagement as an opportunity to foster transparency and build trust with regulators. Early and consistent dialogue with regulatory authorities can demonstrate a commitment to compliance and risk management. Collaborating closely with partner banks enables addressing regulatory concerns promptly, enhancing credibility.
The article delves deeper into how fintech firms and banks can efficiently navigate the changes and stay ahead of the curve. Some include enhanced compliance measures through clear articulation of responsibilities, transparent responses to regulatory requests, and proactive identification of compliance gaps. Other approaches include a customer-centric focus that prioritizes consumer protection in all activities and adopting a principles-based approach to manage third-party risks and enhance strategic thinking in the organization. By aligning with these regulatory changes, banks and fintechs establish trust with regulators, mitigate compliance risks, and position themselves for continuous growth.
With investors increasingly recognizing the value proposition offered by fintech firms and McKinsey’s research reflecting the industry’s significant revenue growth potential, the maturation of the fintech industry presents new avenues for innovation. Between 2022 and 2028, traditional banking is expected to see an annual revenue growth of around 6% while fintechs are predicted to achieve 15% revenue growth. From addressing unmet needs in emerging markets to capitalizing on the demand for “banks as a service” and embedded finance solutions, there are ample opportunities for fintech firms to expand their market presence and drive revenue growth.
By remaining proactive, adaptive, and innovative, banks and fintech companies, with strong leadership from their boards, can serve as catalysts for collaboration and engagement with regulatory bodies. Viewing the regulatory environment as an opportunity for innovation and differentiation enables building stronger, more resilient business models and enhancing industry-wide credibility. Firms that proactively address regulatory requirements gain a competitive advantage and chart a course towards a more sustainable financial ecosystem.
Read The Financial Brand article here.
Read the McKinsey article here.
Independent board director and business leader Bill Jones is an inspired idea creator and positive change maker. A former public company CEO and CFO, he has been serving on multiple boards in diverse industries, from banking and health care to utility and broadcasting. Bill is known for his financial expertise, transformational approach, and distinct ability to build authentic relationships.
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