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The intensified regulatory scrutiny of regional banks, coupled with heightened capital requirements, is compelling these financial institutions to explore partnerships with FinTech companies as they bolster their compliance and know-your-business (KYB) efforts. This regulatory push may also stimulate increased dealmaking activity in the financial sector.
According to recent reports by Bloomberg, the Federal Reserve has issued “private warnings” to several super-regional banks, typically defined as those with assets ranging from over $100 billion to as much as $250 billion. In these communications, the Federal Reserve emphasizes the need for these banks to address concerns related to compliance and technology, alongside liquidity and capital considerations. Notable banks reported to have received such communications include Citizens Financial, Fifth Third Bancorp, and M&T Bank Corp.
This heightened regulatory focus coincides with the FDIC’s board of directors convening to discuss a Notice of Proposed Rulemaking (NPR) in collaboration with the board of governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC). Under this proposal, depository institutions with assets exceeding $100 billion would be required to maintain a minimum amount of long-term debt.
However, this shift in balance sheet composition could potentially limit the capital available for funding technology initiatives, as servicing the outstanding debt becomes an added obligation. Furthermore, the emphasis on technology and compliance necessitates that banks reassess their data utilization and system capabilities to ensure business operations remain compliant, particularly regarding customer onboarding and transaction processing.
The government’s “warnings” are expected to lead to corrective actions, which may prompt banks to seek the assistance of alternative data sources and providers, including FinTech firms, to address these compliance and technology challenges. As a result, the use of FinTech solutions may accelerate back-end processes, ultimately leading to smoother and more seamless account openings and transactions.
Simultaneously, regulatory mandates are gaining momentum. Charles Zhu, vice president of product at Enigma, noted that the Financial Crimes Enforcement Network (FinCEN) is developing new rules that will provide specifics on the data required for documenting ultimate beneficial owners, including those with ownership stakes exceeding 25% in a business. Zhu described this regulatory pace as rapid, and he estimated that many banks are currently allocating as much as 5% of their revenues to manage compliance issues. Traditionally, financial institutions have attempted to handle all their KYB (know your business) and KYC (know your customer) activities internally. However, a partnership approach can help distribute the compliance workload effectively.
Several digitalization initiatives in the customer onboarding space have already emerged. For instance, Virtusa and Thought Machine jointly launched a platform earlier this year designed to assist financial institutions in onboarding small- to medium-sized businesses (SMBs).
In a separate interview, Charlie Youakim, CEO of Sezzle, suggested that dealmaking activity within the financial services sector may intensify as banks increasingly recognize the suitability of certain FinTech firms as wholly-owned components of their operations. He noted that FinTech companies have grown more attuned to the regulatory and compliance requirements and have undergone a professionalization process, making them potential assets for traditional banks.
The evolving partnership landscape between traditional banks and FinTech firms may offer a promising avenue for enhanced regulatory compliance and technological innovation within the financial industry.
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