Leveraging Regulatory Compliance by Ben Jackson

Leveraging Regulatory Compliance for Innovation and Success.

Technological advancements, fintech failures, and regulatory changes have led to fintech value chains receiving scrutiny from both regulators and banks.

This underscores the need for better collaboration on compliance among all participants in the financial services value chain.

The trend started in 2022, when the CFPB announced that it would invoke a “dormant authority” from the Dodd Frank Act of 2010 to examine nonbank financial services companies that “the CFPB has reasonable cause to determine pose risks to consumers.”

This marked a shift in regulatory compliance responsibilities, spreading the burden beyond banks to their partners across the value chain.

The issuance of a final rule in 2024 around open banking that requires companies to share data with one another also has the various participants looking at each other more closely.

The collapse of middleware provider Synapse in 2024 left fintechs like Yotta, and their partner banks like Evolve, scrambling to find customers’ money. The collapse hurt the reputation of fintechs and led to the proposal of a recordkeeping rule from the Federal Deposit Insurance Corp. would force banks and their partners to work more closely together.

Most recently, in early January the Consumer Financial Protection Bureau released a proposed interpretive rule that would bring a multitude of products, from credit card rewards to crypto wallets to sports betting apps under the umbrella of Regulation E.

All of these rules would reshape how value chain participants interact with one another, but some companies think that the beginning of the second Trump administration in January will create an era of deregulation.

This should not be a strategic assumption for a number of reasons. First, the regulators will not stop enforcing the rules on the books, even if their focus changes. Additionally, the prospect of customers (read “voters”) losing money might inspire the new agency heads to keep some of the proposed rules of their predecessors in the pipeline.

History also might offer some clues. In the first 3 years of the first Trump administration, under Kathy Kraninger the CFPB filed 69 enforcement actions (and an additional 48 in 2020). That’s more than the 67 of the Biden administration’s first 3 years under Rohit Chopra. Looking over the past year, it seems the previous director will beat the current director in terms of total enforcement actions.

With this in mind, companies across the value chain should operate under the assumption that the rules on the books now are going to stay and plan accordingly.

This means participants across the value chain need to work together to elucidate what their obligations are both under the regulations and under their service contracts.

While this will make the compliance departments happy, it can have benefits beyond that.

Regulations and their accompanying guidance should not be seen merely as ‘check-the-box’ exercises. Instead, they offer a structured framework for identifying, evaluating, and managing risks effectively.

These regulatory tools can also be a way of vetting potential partners to ensure that everyone is on the same page about what a product is (credit, debit, prepaid, etc.). This can also serve as a starting point for a discussion on what needs to be done to make a program successful.

While discussing the new environment for fintechs, one banker told me that compliance communication should be a two-way conversation and that fintech program managers, processors, and other providers should ask their banks how good the bank’s team is at managing compliance. Companies should have an honest discussion with their sponsor banks about whether or not those banks are going to help them stay out of regulatory trouble.

Over the past few years, there have been a number of enforcement orders that show what happens to banks who jump into new lines of business before they are ready. The problem is that they can drag promising fintechs down with them.

So, compliance competency needs to be an open conversation. But rather than becoming a huge hurdle, it can be an additional place for collaboration. Some points to cover might include what kind of relationship the bank has with its regulators, does it have dedicated and experienced compliance people to work with fintechs, and how can the bank and the provider work together to ensure all regulatory requirements are met.

As opportunities for financial innovation grow, banks, fintechs, processors and service providers should all look for ways to use the compliance process as tool for driving that innovation forward.

Viewing compliance solely as a burden risk misses valuable opportunities. By embracing it as a collaborative framework, financial innovation can thrive while ensuring regulatory alignment.

About the Author.

Ben Jackson is the chief operating officer of the Innovative Payments Association where he works on payments regulation, fraud prevention, and industry education. Previously he was the director of the prepaid advisory service for Mercator Advisory Group, where he oversaw research and consulting on open-loop and closed-loop prepaid cards. Prior to that he worked as a journalist and municipal bond analyst.

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