Understanding Risks in Fintech Banking

🚨 Fintechs: Do you know what’s going on with your partner bank? Regulatory pressure on fintech partner banks continues to mount.  In addition to the public enforcement actions, several partner banks are now under non-public (informal) orders.  Still more have been told enforcement actions are coming. For fintechs, these orders can have existential consequences.  🔻 Reacting to regulatory pressure, several fintech partner banks have offboarded partners.  🔻 Others have stopped taking new fintech partners or allowing their partners to launch new products.  Monitoring regulatory pressure on your partner bank is hard.  Don’t expect your bank to keep you posted: sharing confidential supervisory information - including, for example, the threat or reality of an informal regulatory enforcement action - is a federal crime.  Even so, there are things you can do: 1️⃣ Understand your bank’s business model:  How much does it depend on revenue from banking-as-a-service?  Many banks with limited banking-as-a-service revenue may need to reconsider their commitment to the business in light of rising risk and compliance costs. 2️⃣ Understand your bank’s financial condition.  Is it making healthy profits?  Is it amply capitalized?  Does its balance sheet indicate significant concentrations in risky assets, such as commercial real estate? 3️⃣ What’s your impression of your bank’s risk management team and tech?  If they’re not impressing you, they’re probably not impressing their regulators, either. 4️⃣ Know who else your bank partners with:  Your own activities may be pretty benign, but if your bank’s other fintech partners include high rate consumer lenders or crypto businesses, your bank may be at particular risk of regulatory scrutiny. 5️⃣ Have a contingency plan.  Or a retirement plan.  Your choice. What else? Leave your questions and suggestions in the comments.  Feel free to DM me if you want to inquire confidentially.  My team can assess your situation and provide advice. #regulation #banks #fintech

FinTech is at a fork in the road. I recently attended an off-the-record conversation with a former federal financial regulator who provided an analysis of the current state of fintech. My key takeaways: “We're either going to have a viable fintech sector or we're not.” Currently, 120-150 out of approximately 4,700 banks have some sort of fintech partnership but for most it’s not material to their business. There are really about 20ish banks that have multiple fintech partners, with 12 being heavily focused on BaaS. However, 6 or 7 of these 12 banks are under consent orders, indicating heightened regulatory scrutiny that’s impacting the entire model of bank-fintech collabs. The increased regulatory scrutiny is making banks reluctant to form new fintech partnerships. This hesitation creates a chilling effect on the fintech ecosystem, as access to banking partners is essential. The regulator emphasized that enforcement actions can take 2-3 years to resolve. During this time, banks under consent orders are often restricted from issuing new products or onboarding new fintechs without prior approval. This delay can be detrimental to fintechs who cannot afford to wait years while technology evolves rapidly. “Fintechs forced to seek government approvals to launch or tweak products find themselves waiting around like Marisa Tomei in My Cousin Vinny: My biological clock is ticking!” The regulatory reluctance to allow fintech partnerships with banks stems from both practical and political considerations. Agency leaders often prefer to avoid risks to steer clear of political backlash: “If you’re leading one of these agencies the best thing you can do for your own sanity is to say ‘No’ to everything and not allow any risk into the system. Because if you allow risks into the system and something happens, political opponents will savage you. If nothing happens, no one will say: Hey, you did a great job for America! But if something goes wrong people will say: It’s because of people like YOU that America is going to hell in a hand-basket! The regulator’s advice? Build rigorous compliance into your sponsor bank and fintech from the start. “Move fast and break things works if you’re disputing taxis and hotels, but you can't move fast and break things in financial services – they lock you up for that!" If you're a fintech, maintaining redundant banking relationships is crucial: "if your bank gets a consent order, and you don’t have access to other banking partners, you’re going to be knee-capped. Plus finding a new bank will be tricky: You go to a new sponsor bank and say, "It wasn't my fault!" There’s a good chance the new bank’s reaction will be: How do we know you weren’t the problem?” The fintech sector's success hinges on the delicate dance between innovation and regulation. Like Vinny Gambini's closing argument, fintech must present a compelling case that leaves no reasonable doubt about its ability to innovate responsibly.

I've spent $2M+ on legal fees and worked with 15+ law firms building fintech. Most founders know how to work with engineers but are lost when it comes to legal/compliance. Here's the untold truth about building fintech startups. The reality most fintech founders face: You raise money on an amazing vision. Build a waitlist. Ready to launch fast. But then you hit the legal wall: • Hire expensive lawyers • They say it's never been done • Give complex advice • Kill your innovation • Delay launch by months Your investors get impatient. Sound familiar? Here's what actually works: 1. CEO mindset Regulatory compliance needs to be the CEO's top focus. More important than product or engineering. Why? No fintech has succeeded without great regulatory and compliance. Even Stripe's founder John Collison said hiring great counsel was crucial to their success. 2. The Art of Managing Lawyers Most lawyers excel at one thing: Making everything sound like an existential risk. Not because they're malicious. It's how their brains are wired. They have to cover all bases. But don't fall into the "everything is a risk" trap. 3. Hiring the Right Firm Look for these qualities: • Deep specific experience • Understanding of regulatory goals • History of creative solutions • Track record of simplifying products • Asking the right questions on day 1 • Focus on making progress Bad lawyers push paper. Great lawyers unlock innovation. 4. Getting Results (Without Slowing Down) Remember: You're in the driver's seat. If a big-name lawyer isn't working, you can always find a bigger one. Key principles: • Never ask for yes/no answers • Don't outsource your thinking • Keep product strategy in-house • Focus on probability, not possibility • Start simple, then add complexity • Study competitor implementations 5. The Hidden Truth Most lawyers will give you 10 reasons why everything needs to be built from scratch. But here's what they won't tell you: • Most solutions already exist • Risk levels are often exaggerated • Creative alternatives are available • Progress matters more than perfection 6. Making Hard Calls As CEO, you'll face tough decisions with high uncertainty. Sometimes that means: • Not following lawyer advice • Firing firms that slow you down • Taking calculated risks • Trusting your instincts It takes courage as a first-time CEO. But that's what separates successful fintech founders from the rest. The winners aren't those who avoid all risk. They're the ones who: • Understand the regulations • Make informed decisions • Move fast despite uncertainty • Build amazing products Don't let legal fears kill your innovation. Find lawyers who help you build, not just avoid risk. The future of fintech belongs to founders who master this balance.

If you’re a fintech, your entire operation likely depends on your bank partner. But what happens if that partner faces regulatory trouble or decides to off-board you? You lose access. You lose your business. Fintechs don’t control their regulatory destiny because regulators deal with banks, not fintechs, leaving you in the dark about risks that could put your company out of business overnight. That's why Fintechs need to consider becoming banks. Future proofing.