Embedded Finance News: Compliance Automation, Generative AI - The Takeaway

Every month we compile some of the most important and interesting embedded finance and fintech news stories and tell you why they matter. Find last month’s issue of The Takeaway here.

Don’t forget to sign up for our newsletter to get the Takeaway and more embedded finance news delivered straight to your inbox. We promise we’ll only send you the important stuff.

1. Alloy report finds that a majority of fintechs paid at least $250,000 in compliance fines

Identity risk management company Alloy released a report that found that 60% of the surveyed fintech companies have paid compliance fines of at least $250,000 in the past year. One-third of respondents actually reported paying over $500,000, with large fintechs (those with more than 1,000 employees) more likely to pay higher fines.

The report found that, while 93% of fintechs found Bank Secrecy Act (BSA) compliance requirements the most challenging to meet, 80% were going beyond the minimum required risk management. The top two concerns driving fintechs’ BSA decisions were customer confidence (34%) and reputational damage (25%).

That being said, 55% of respondents said that lack of automation was the biggest challenge to meeting BSA requirements. However, 53% of fintechs also said that they were using third-party platforms to manage compliance, and 84% were looking into AI and machine learning compliance solutions.

The Takeaway: Fintech companies need to stay ahead of compliance and risk management.

While compliance fines can be hefty, damage to customer confidence and the fintech’s reputation can lead to greater losses in the long term. 

Fintechs need to go above and beyond government requirements to stay ahead of fraud. BSA compliance may be intimidating at first, but if fintechs find the right guidance, collaboration, and support from banks, product partners, and a reputable banking as a service provider, they can stand up a strong fraud and compliance program. With a robust infrastructure in place, fintechs can innovate while knowing they have protective measures in place to address risk management. 

Watch our on-demand seminar, "The 5 Critical Elements of Compliance for Fintechs."

2. Five regional U.S. banks get credit downgrades

S&P Global Ratings downgraded five regional U.S. banks, including some of the nation’s largest lenders. They include KeyCorp, Valley National Bancorp, Comerica Inc., Associated Banc-Corp, and UMB Financial Corp. The news came on the heels of Moody’s announcement that the credit ratings agency was putting six large U.S. banks under review for potential downgrades.

S&P cited the “tough” lending environment as the reason behind the downgrades. “The sharp rise in interest rates and quantitative tightening deployed since March 2022 to combat high inflation are weighing on many U.S. banks' funding, liquidity, and spread income," the report says. "These factors have also caused the value of banks' assets to fall and raised the odds of asset quality deterioration."

In addition, the aftermath of the Silicon Valley Bank's failure has intensified the strain. Regional banks have been compelled to offer higher interest rates on deposits in a bid to retain customer funds. Despite these efforts, CNN says many regional banks have struggled to halt the outflow of deposits.

The Takeaway: As deposit costs continue to go up, embedded finance can be a new source of low-cost deposits 

Attracting and retaining deposits in the current economic environment has been extremely difficult and expensive. Low-cost deposits have been on the decline as federal interest rates go up and customers move their money from non-interest-bearing accounts into interest-bearing ones. 

However, banks can partner with fintechs and embedded finance companies to more efficiently reach new customer segments and attract stickier, lower-cost core deposits. Embedded finance companies excel at addressing the needs of customers in niche markets. If banks want to reach those same customers on their own, they would likely have to expend more resources or offer more competitive rates, both of which cut into their potential returns.

Want to know more about how partnering with embedded finance companies can increase stable low-cost deposit growth? Download our full guide.

3. Banks are researching the best uses for generative AI

According to a KPMG report, financial institutions are ramping up investments and looking at how they could best implement generative AI like ChatGPT into their services. Over 40% of surveyed financial service executives said they planned to at least double their generative AI investments. 

“Almost all banks are evaluating generative AI opportunities,” Christine Livingston, managing director and leader of AI at business consulting firm Protiviti, told American Banker. However, she says only a few have managed to apply generative AI in any “meaningful” way.

76% of financial services executives surveyed in the KPMG report identified fraud detection as a key application for generative AI. JPMorgan Chase is reportedly using AI to detect potential fraud in emails, and Goldman Sachs is using it to help their software engineers in developing code. Other banks have used AI to simplify internal processes, like transcribing customer service calls and helping employees easily find bank policies.

The Takeaway: Generative AI can be used in conjunction with, not in place of, other tools.

Generative AI has potential applications for some issues plaguing the financial industry, but it’s not a catchall. Depending on how they use it, implementing AI means financial institutions also have to account for new risks, such as fairness and explainability, and develop appropriate governance frameworks.

4. HSBC invests in supply chain finance platform to develop embedded finance solutions

HSBC announced a $35 million investment to create a joint venture with Tradeshift, a trade platform that offers supply chain marketplace services and B2B payments solutions.

The joint venture would embed various financial services, including payments, across Tradeshift’s trade and e-commerce marketplaces, to streamline the flow of working capital across supply chains. TechCrunch posits that the partnership will address post-pandemic working capital issues in the supply chain industry, with HSBC providing needed financing.

Barry O’Byrne, CEO of Global Commercial Banking at HSBC, said in a statement that it partnered with Tradeshift to help businesses and suppliers trade more smoothly using technology. “This agreement supports our strategy of being a digital-first bank, which includes our commitment to partnering with fintechs and embedding our solutions into the platforms of others.”

The Takeaway: Embedded finance helps companies scale, especially B2B. 

The partnership between HSBC and Tradeshift is a strategic one: both can leverage the other’s strengths to their mutual benefit. HSBC can tap into Tradeshift’s innovative technology and platform to reach new customers, and Tradeshift can leverage HSBC’s financial services to provide embedded finance tools and products their customers need.

Embedded finance provides opportunities for businesses and banks alike. The global embedded finance market is expected to grow to over $588 billion by 2030, indicating the value that companies see in it. Not only can it potentially streamline operations, but it also helps attract new customers and scale business in challenging environments. 

Wondering how embedded banking could help your business? Contact Treasury Prime — we have a true multi-bank network, the deepest bank core integrations, and extensive compliance experience. Read more about our $40 million Series C Funding and why Tearsheet named us the Best Banking as a Service company for the second year in a row. Talk to the best embedded finance team in the industry.

Related embedded finance content:

Harnessing the Power of Embedded Banking to Build New Revenue Streams

Leveraging Multi-Bank Partnerships for White Label Banking Products

How Embedded Finance Can Help Your Vertical SaaS Company During a Recession