Episode 562: Hot Takes: Regulatory Headwinds for BaaS

In This Episode Warning: Extra spice added -- new sauces and participants! The stream of consent orders against banks that offer BaaS continues. Fintech partner banks drew 1/3 of all formal enforcement orders by federal banking agencies in the 4th quarter of 2023, that's quite a bit when you consider that fintech partner banks only account for roughly 3% of all U.S. banks. BaaS is here to stay -- it's a great way for community banks to grow, big banks are already on board and will do more, and entrepreneurs will want to continue to create better banking experiences which means they'll need to partner with banks. Jason Henrichs brings you our latest Hot Takes with regulars Kiah Haslett, Bank Director; Alex Johnson, Fintech Takes; and Jason Mikula, Fintech Business Weekly, as they are joined by Barb MacLean, SVP, Head of Tech Operations & Implementation, Coastal Community Bank and Allen Denson, Partner, Litigation, Morgan, Lewis & Bockius, LLP.  The flaming hot panel discusses why BaaS is facing regulatory headwinds, what banks should do, and how the North Star needs to be a BaaS solution that provides the optimal blend of technology and compliance, all while having some fun. From the stage of FinovateFall we bring you this episode of Breaking Banks. Read the full transcript here. Podcast Content: Chapter 1: 00:00 - Welcome and Episode Overview Hosts Brett King, Jason Henricks, and JP Nichols introduce this episode, recorded live at Finnovate, featuring hot takes on banking as a service (BaaS) and the regulatory challenges surrounding it. Chapter 2: 03:45 - Turbulent 2024: What’s Burning? The panel dives into the year's most challenging issues in banking and fintech, including broker deposit reclassification and cybersecurity breaches, setting the stage for a fiery discussion. Chapter 3: 12:30 - Consumer Awareness: FDIC and Fintech Misunderstandings Exploring whether consumers truly understand the risks when engaging with fintechs labeled as FDIC-insured and why traditional disclosures fail to inform effectively. Chapter 4: 22:10 - Responsibility and Accountability in BaaS Panelists debate how responsibility is allocated between banks and fintech program managers when issues arise, with differing views on splitting regulatory versus economic liability. Chapter 5: 32:40 - Regulators and the Banking as a Service Landscape A discussion of the evolving role of regulators in BaaS, from non-objection policies to potential frameworks for managing risk in fintech partnerships. Chapter 6: 43:15 - Deposit Treatment: Old Rules, New Challenges A deep dive into whether current deposit classification rules are fit for purpose in today’s fintech-driven banking environment, including the implications of reclassifying fintech deposits as brokered. Chapter 7: 55:00 - FBO Accounts: An Aging Framework The inefficiencies of the "for benefit of" (FBO) account structure and its limitations in a modern fintech ecosystem are dissected, with calls for innovation in banking frameworks. Chapter 8: 01:05:30 - Banking Partner Standards: Who Should Participate? Examining whether all banks should be allowed to partner with fintechs, considering the technical, regulatory, and operational complexities involved. Chapter 9: 01:14:45 - Closing Thoughts and Audience Engagement Final reflections on BaaS accountability and the role of regulators, along with opportunities for audience interaction and some lighthearted hot sauce giveaways. Chapter 10: 01:18:00 - Outro and Credits A wrap-up of the episode with producer credits, reminders to subscribe, and details on how to share and support Breaking Banks. Related Content: Episode 464: Second Wave BaaS & “Deep Tech” Huawei Does Gen-Fi Bank-Fintech Partnerships, Open Banking and AI...oh my! A Digital Banking Revolution in SEA: GXBank and Mastercard Shopify Finance: Fueling Merchant and Small Business Growth