Embedded Finance News: Bank Risk Management, Fraud Detection, BNPL

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

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1. US regulators cracking down on banks’ risk management practices

US financial regulators are reportedly following through on earlier warnings of increased bank supervision, according to Reuters. In recent months regulators have reportedly conducted surprise off-cycle reviews at regional and community banks of their “CAMELS” rating, which measures bank safety based on capital, asset quality, management, and liquidity. 

Some banks had components of their CAMELS rating downgraded, according to the Community Bankers of America, although regulators have said that the banks’ overall CAMELS rating will not currently be affected. Some reasons for the downgrades include insufficient capital, management issues, and exposure to commercial real estate.

The Takeaway: Greater scrutiny means a greater need for banks and fintechs to work collaboratively.

Financial institutions are dealing with increased regulatory scrutiny and oversight, which will likely affect their fintech partners. Banks will need to closely oversee their third-party relationships and in many cases move to a Bank-Vendor Partnership BaaS model in which they oversee compliance and have direct communication with fintech partners, rather than offload compliance to a BaaS provider.

On the other end, fintechs and brands can help ease bank concerns by being proactive with their compliance and risk management programs. That is one of the central components of preparing for BaaS partnerships.

To learn more about how to build a culture of compliance at your organization, watch our on-demand webinar:

2. Wall Street CEOs say over-regulation will negatively impact economy

A cadre of Wall Street CEOs testified before the Senate Banking Committee against the Biden administration’s proposed regulatory changes, which were the result of the bank failures earlier this year. 

The group included JPMorgan’s Jamie Dimon, Citigroup’s Jane Fraser, Bank of America’s Brian Moynihan, and Goldman Sachs’ David Solomon. The CEOs strongly oppose several proposed regulations that could impact their profitability, including recent Federal Reserve rules mandating larger banks to maintain extra capital on their balance sheets. The industry argues that these regulations, collectively known as the Basel Endgame, would restrict lending and undermine bank balance sheets at a critical juncture when greater flexibility is deemed essential for the sector.

In a letter to Biden, American Bankers Association President and CEO, Rob Nichols, said that such a proposal would raise costs for banks of all sizes and, in certain sectors, have the unintentional consequence of pushing customers to less regulated financial firms.

According to Fortune, only a few Democrats appeared to support the proposed regulations, with most Republicans appearing to be against them.

The Takeaway: A tough regulatory environment means banks need to ensure their capital holdings are robust

While the intense policy battle plays out between banks and regulators, procuring low-cost deposits is all the more important in this volatile environment. Traditional banks are increasingly turning to fintechs and embedded finance as key allies. These entities provide a reliable source of stable and cost-effective deposits, capitalizing on their ability to build customer loyalty through convenient and tailored offerings. By forming strategic partnerships with embedded finance firms aligned with their values, banks can seize a valuable opportunity to expand their customer base.  

To learn more about how embedded finance can provide a reliable source of low-cost bank deposits, read our guide. 

‍3. Treasury Prime partners with Effectiv on fraud detection and risk management

Treasury Prime announced it is partnering with fraud and risk management platform, Effectiv, to provide enhanced fraud detection and risk management solutions to help financial firms and embedded finance companies reduce potential losses. 

The partnership will allow companies in Treasury Prime’s network to leverage Effectiv’s transaction monitoring solution, which uses AI to analyze customer behavior, continuously monitor transactions, and identify anomalies in real-time.

The Takeaway: Fraudsters are becoming increasingly advanced, and businesses need real-time fraud detection to protect themselves from potential losses.

Fraud detection and risk management have been top of mind for financial firms and regulators alike. As real-time payments become more widespread, it’s become imperative for all businesses in the financial industry to strengthen their anti-fraud programs equally.

"We are dedicated to equipping our customers with the tools they need to thrive in an increasingly complex financial ecosystem," says Mark Vermeersch, Chief Platform Officer of Treasury Prime. "With the speed at which money moves today, fraud detection needs to be just as fast. We're thrilled to be partnering with Effectiv and enabling customers to combat fraud more holistically."

4. OCC says banks should focus on risk management, especially regarding fintech partnerships

The Office of the Comptroller of the Currency (OCC) reported on key risks facing the banking system in its Fall 2023 Semiannual Risk Perspective. In the report, the OCC highlighted the need for banks considering fintech partnerships to carefully examine the risks associated with each third-party relationship.

The report said that banks need to have effective contracts to address fintech-related risks. In “nested relationships,” where a fintech provides services to other fintechs without proper controls, the OCC considers banks responsible for their fintech partner’s practices. The OCC also noted that, as banks expand their digital products and services, they also need to keep up with the associated risks.

The Takeaway: Strong compliance and risk management are necessary for successful, long-lasting bank-fintech partnerships.

Financial regulators are increasing regulatory oversight by mandating banks to tighten their scrutiny over third-party vendors. This means that banks need to carefully shape the structure of their relationships within partnership contracts. 

This was a major topic of discussion at Treasury Prime’s User Conference during Money 20/20. Principal advisor Ethan Singleton and Treasury Prime’s VP of Banking Jeff Nowicki discussed the various approaches and safeguards that banks can incorporate into their contracts.  

Here are the highlights:

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To watch the full session on-demand, access it here:

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5. Bank of America finds slowdown in BNPL growth

A Bank of America analysis on buy-now-pay-later found that while BNPL providers experienced a significant boost over the holidays, overall growth has slowed compared to the previous year.

According to the report, major players like Block’s Afterpay and Affirm both saw a slowdown in growth. Because of decreasing investor interest and heightened regulatory concerns, industry analysts foresee only a few BNPLs remaining “independent,” with the rest either shutting down or getting acquired.

The Takeaway: Regulatory compliance will decide which BNPL companies survive and thrive.

Like other businesses in the embedded finance space, BNPL providers are facing a tougher regulatory environment; compliance and risk management could determine the long-term success of any financial services company.

Treasury Prime has successfully launched over 100 embedded finance programs with the largest network of banks in the industry. Discover the transformative potential of embedded banking for your company. Benefit from our wealth of banking and compliance expertise to ensure the safety and success of your program. Talk to the best embedded finance team in the industry.

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