Fintech Business Podcast

This month, Alex Johnson and I had the chance to talk about:

* Current launched a credit-building secured charge card. While it features a neat bit of engineering, it may face some of the same limitations and challenges of other offerings in the space.

* Plaid announces (well, sort of?) payroll API partnerships with Pinwheel and Atomic — what to make of the news?

* Lineage Bank’s rapid, BaaS-powered growth may be a cautionary tale; Fed warns Goldman on BaaS compliance risks

* Roger, a neobank for military recruits, launches

* and, as always, what Alex and Jason just can’t let go of

(I’m testing adding an automated transcript to this post — let me know if you like it, hate it, or otherwise have thoughts on this addition!)

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Alex Johnson, creator of the Fintech Takes newsletter, and I are happy to bring you this very special episode of Fintech Recap. We had the honor of sitting down with Mark Gould, the Chief Payments Executive for Federal Reserve Financial Services.

For context, we recorded this episode in mid-July, on the eve of the launch of FedNow. We had the chance to hear from Mark on:

* Mark’s background and 30+ year career at the Federal Reserve

* More than interest rate policy: The Fed’s Federal Reserve Financial Services group, which is responsible for payments products like cash, ACH, wires — and FedNow

* The creation and launch of FedNow, including potential uses cases and possible impacts on other payment methods

* How Mark thinks about defining “success” for FedNow

* and much, much more!

Many thanks to Mark and his team for taking the time to sit down and speak with Alex and me on the future of US payments!

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Alex Johnson, creator of the Fintech Takes newsletter, and I are happy to bring you the latest episode of our monthly podcast, Fintech Recap, where we unpack some of the biggest stories in fintech, banking, and crypto.

This month, we had the chance to talk about:

* FedNow finally launched — now what?

* Block sues Visa and Mastercard over interchange rates, Visa CEO bashes merchant surcharges, and “Durbin 2.0”

* Mastercard tells payment processors to cease working with cannabis merchants

* Worldcoin, Sam Altman’s vaguely dystopian global ID/crypto project, goes live

* And, as always, what Alex and Jason just can’t let go of

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In this episode, I spoke with one-stop money management platform for small businesses Wave’s CEO, Zahir Khoja. We had the chance to discuss:

* Zahir’s fascinating background, including working in Afghanistan and for Grameen Foundation

* Wave’s capabilities and target segments

* How the company thinks about buy vs. build vs. partner & its pricing and cross-sell strategy

* The importance of human advice for important decisions

* and more!

If you’re interested in learning more about or entering the contest that Zahir mentioned in our conversation, you can do so here.

The last several years have seen quite the rollercoaster of investment-related trends: meme stonks, SPACs, crypto, and now… Treasuries? Another emerging trend: generative AI. In this episode, I had the chance to sit down with investing app Public’s co-CEO Leif Abraham to talk about all of that and more, including:

* How AI for investing is and isn’t different than previous trends like PFMs and roboadvisors

* How Public got comfortable deploying user-facing AI capabilities

* Why Public ended payment for order flow (PFOF) and decided to accept “tips”

* How Public stands out in a crowded investing market

* and more!

Also, a big congrats to the Public team on today’s announcement of their expansion to the UK market!

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Hey all, Jason here.

Alex Johnson, creator of the Fintech Takes newsletter, and I are back! Congrats to Alex on the new addition to his family.

We’re happy to bring you the latest episode of our monthly(ish) podcast, Fintech Recap, where we unpack some of the biggest stories in fintech, banking, and crypto.

This month, we had the chance to talk about:

* Goldman’s shrinking consumer ambitions, amid rumors it is in talks with American Express to take over its Apple partnership

* Fraud consortiums are SO on trend right now: Plaid’s Beacon, Unit21’s Fraud DAO & SardineX

* Fintech M&A: X1 and Robinhood, FIS and Bond, and others

* and, as always, what Alex and Jason just can’t let go of

Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday:

Hey all, Jason here.

This Sunday’s note is coming to you from Hilvarenbeek, in the south of the Netherlands, where I’m camping and attending a music festival.

During last week’s Money2020, I had the chance to sit down with compliance tech startup Cable’s cofounder and CEO Natasha Vernier. If the company sounds familiar, that’s probably because her cofounder and I recently gave a “Masterclass” together during New York Fintech Week.

Natasha and I had the chance to chat about:

* Natasha’s journey building and scaling the financial crime function at UK neobank Monzo

* How those experiences and challenges led Natasha to co-founding Cable

* The process of raising Cable’s recently announced $11 million Series A

* What Natsha is keeping an eye on from a regulatory standpoint

* Her biggest surprise about moving from the UK to the United States

* and more!

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I know it’s hard to remember now, but there was a time when BNPL — buy now, pay later — felt like the bleeding edge of consumer fintech (even if point-of-sale financing has been around for literally generations!)

It has been a wild ride for market leader Klarna, which is rather unique in the space: it was founded in 2005, it is a bank in Europe, and it has historically been profitable.

Klarna’s Chief Commercial Officer and former head of the US business David Sykes joined to discuss all that and more, including:

* If Klarna thinks of itself as a “BNPL company”

* That $46 billion valuation

* How Klarna succeed in the US, when other foreign imports haven’t

* The threat from Apple’s BNPL offering, Apple Pay Later

* and more!

Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday: https://fintechbusinessweekly.substack.com/subscribe

Hey all, Jason here.

I recently partnered with Cable’s Chief Product Officer Katie Savitz to present a Masterclass at the Empire Fintech Conference during NY Fintech Week. We profiled six recent developments impacting Banking-as-a-Service and how stakeholders can use technology to respond.

If you weren’t able to attend (or just need a refresher!), this podcast/post combo is for you!

(And extra great timing, as Cable today announced it raised an $11M Series A to automate effectiveness testing of financial crime controls!)

Six Key Developments in Banking-as-a-Service

The U.S. banking system is experiencing its greatest stress since the 2008 Great Financial Crisis and regulators are seeking to address risks being revealed. BaaS may make the banking system more resilient, but it also introduces new risks. Six recent developments shed light on how BaaS may evolve going forward.

* OCC Office of Financial Technology. One explicit mandate of the OCC’s Office of Financial Technology – recently formally established and led by Prashant Bhardwaj – is to support “high-quality supervision of bank-fintech partnerships,” which portends continued regulatory scrutiny, but also opportunity for industry engagement with regulators.

* OCC 2023 Bank Supervision Operating Plan. Further signaling the OCC’s increased focus on BaaS, the agency’s 2023 supervision operating plan calls for specific focus on third-party risk management and highlights BSA/AML risk.

* Acting Comptroller Hsu 2022 TCH+BPI Conference Remarks. Acting Comptroller Hsu’s speech specifically addressed the growth of BaaS operating models. Hsu expressed concern about the growing complexity associated with BaaS and reiterated the primacy of “safety and soundness” concerns, while acknowledging opportunities from technological innovation.

* November 2022 U.S. Treasury Department Report on Non-Bank Firms in Consumer Finance Markets. The Treasury Department report specifically flagged “new risks to consumer protection and marketing integrity” from fintechs and called for enhanced supervision of bank-fintech partnerships.

* CFPB Invokes Dormant Authority to Examine Non-Bank Companies. While the CFPB is focused first and foremost on consumer protection, it has shown a willingness to use its authority to supervise non-bank entities that may pose a risk to consumers, potentially including non-bank fintechs and platforms.

* OCC-Blue Ridge Bank Agreement. The OCC’s formal agreement with Blue Ridge – arguably the first major BaaS enforcement action – provided a wealth of detail about regulatory scrutiny of risks in bank-fintech partnerships, and areas of financial crime compliance tech stacks that may need uplifting.

Increasingly, growth and innovation in the banking industry is happening outside the banking regulatory perimeter and, for BaaS-focused banks, asset size is no longer a good reflection of risk.

With the sector’s growth now attracting more regulatory attention, to survive, all stakeholders need to adapt.

The era of banks onboarding fintechs with little to no insights is finished.

For bank-fintech partnerships to be sustainable, they must be done in compliance with regulatory requirements. While the knee-jerk response is to throw bodies at the problem, this not only is an expense, but also has scalability limitations. Instead, a new approach enabled by new technology is needed to make these partnerships not only possible, but profitable.

The Compliance Problem for BaaS

Rapid customer growth and disaggregated responsibilities are primary drivers of compliance breakdowns. Both factors are especially prevalent in BaaS.

In BaaS, compliance teams used to managing one institution and their own direct customer pool now have to deal with multiple fintechs, each with their own controls and indirect customer pools.

This demands a whole new level of compliance capabilities. Many banking providers still rely on legacy systems and manual processes, but those are no longer fit for purpose.

As a result, regulators are already focused on this question for bank-fintech relationships: Who is responsible for what when things break?

The Fincrime Tech Stack & Why Effectiveness Matters

Over the last decade in BSA/AML compliance, banks and fintechs have added more controls, with little idea about how effective they are. Over $270 billion is spent worldwide each year on financial crime compliance, with the majority of that spent on people.

Despite this spending, less than 5% of accounts are tested to understand effectiveness. If banks can't even be sure how effective their own controls are, how can they do that for their fintechs?

But this same exact approach is being used in BaaS – partner banks are adding more fintechs with little idea how effective their controls are, even as the compliance challenges multiply.

Increasingly, regulatory pressure is demanding that you be able to “show, not tell” that your program is effective. Compliance teams need to ask: What part of your tech stack helps you answer questions about effectiveness?

In BaaS, technology solutions for oversight, monitoring, and assurance are essential. For banks, how do you know everything is working at all levels across their fintechs? And for fintechs, how do you reassure bank partners everything is fine?

How can you understand risk better?

The first key compliance task in BaaS is understanding risk better: banks’ own risk, fintechs’ risk, and how fintech risk impacts banks’ risk. Below are practical tips and steps to achieve this:

Bank risk

* Review your own risk assessment more than annually, as circumstances can change quickly in BaaS.

* Update your risk assessment when control failures are discovered, so that you can discuss priorities with senior management.

* Leverage available risk assessment technology solutions to get out of spreadsheets and onto a smarter platform with better workflows.

Fintech risk

* Banks should require fintechs to perform a risk assessment using the same methodology and should collect standard information and documents from each fintech, in order to compare and understand risk across the bank’s fintech portfolio.

* Fintech risk assessments should also be easily updated for changes in circumstances at the fintech level.

* Consultants can provide templates and methodologies, and technology platforms can help with document collaboration. Cable also offers the ability to collect company information and documents, and conduct the same risk assessment for each fintech.

Bank and fintech risk

* Banks should incorporate their fintechs’ risk into the bank’s own risk.

* Banks also need to understand how each new fintech affects their current risk profile and any impacts to their risk appetite.

* Some compliance teams have built out complicated spreadsheets with the help of consultants to do this. Cable also offers the ability to roll up fintechs’ risk assessments into a bank’s risk assessment.

How can you improve oversight and monitoring?

The second main compliance task in BaaS is oversight and monitoring of controls. Below are practical tips and steps to improve these processes:

Identify controls

* Banks and fintechs should have a shared understanding of the controls in place at each fintech.

* Banks should request a controls register as part of standard onboarding documentation collection from fintechs.

Assess control effectiveness

* To the effectiveness point, partner banks must sufficiently monitor and test accounts to understand how all the controls are working at the fintech level.

* Key questions to address include: What data is needed by the bank to conduct oversight? How will data be sent or received timely, and in what format? If supplemental data or information is needed, how will the bank get that promptly? What do each of the bank and fintech need to do to facilitate data sharing?

* Both banks and fintechs need to have a team and technology to handle this monitoring, especially as the bank's fintech program scales.

* Technology like Cable offers automated oversight and assurance processes to identify regulatory breaches and control failures in real-time across each fintech.

Fix and report issues

* Banks and fintechs need to quickly remediate and report any issues, promptly after they happen instead of finding issues months later in periodic audits.

* Banks and fintechs should ensure they have shared issue management tools that give visibility to both sides, as fintechs will most often remediate issues.

* Banks and fintechs should define roles and responsibilities, and have shared understandings of issue prioritization, so the right issues receive proper attention.

BaaS is here to stay, but operational work will overwhelm banks and fintechs unless automated effectiveness testing becomes commonplace. Partner banks need to deeply understand their requirements and deploy technology solutions to enjoy the trifecta of full compliance, resource efficiency, and fast onboarding to grow their fintech programs.

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Hey all, Jason here.

Weren’t in New York or couldn’t make it to this event at Barclays Rise during New York Fintech Week? You’re in luck!

For this panel discussion tackling the question, What Next for BaaS?, I was joined by:

* Amanda Swoverland, Chief Compliance Officer at Unit

* Walt Cox, Head of Partner Banking at Valley Bank

* Neepa Patel, founder/CEO at Themis

* and Nick Farrow, Head of Bank Partnerships at Modern Treasury

We discussed:

* how to define “banking-as-a-service”

* how banks/platforms think about selecting what partners to work with

* how stakeholders work together to manage risks and ensure compliance

* whether and how regulation of BaaS could be improved

* and much more!

Many thanks to Valley Bank and Unit for sponsoring the event and to Barclays Rise for hosting us!

Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday: