Embedded Finance News: Bank Capital Requirements, Checking Accounts, 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. Regulators place stricter capital requirements on banks over $100 billion

Invoking the international standards established by the Basel Committee, Federal regulators unveiled proposed changes that will among other things raise the capital requirements of banks with over $100 billion in assets, and require them to boost the amount of capital set aside by an estimated 16%. On July 27, 2023, the federal banking agencies (the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Federal Reserve Board”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”)) jointly issued the long-expected notice of proposed rulemaking that would replace the federal banking agencies’ risk-based capital framework for large banking organizations with the Basel international standards.

If finalized, the  new regulations would also force more banks to include unrealized losses on certain securities in their capital ratios, which will close the loophole that in part led to the liquidity run which ultimately caused Silicon Valley Bank’s failure. In response to concerns about how the increased capital will impact lending, regulators explain that enhancing the quality and quantity of capital will ultimately result in creating greater accessibility to capital while stabilizing the overall financial system.  Specifically, Chairman Gruenberg explains:  “Implementing a more risk-sensitive requirement will serve to ensure that banks shoulder the risk of their own operations, preventing the build-up of excessive systemic risk.”  See Chairman Martin Gruenberg Remarks. Additionally, the regulators are providing an extensive comment period to the proposed rulemaking and even if passed, U.S. Banks would have until 2028 to fully comply.

The Takeaway: New bank capital requirements may lead to more credit opportunities for smaller B2B finance companies.

The banks affected by the potential new regulations may need to increase prices in order to offset the capital restrictions. If so, this may give a competitive edge to smaller financial institutions not bound by these rules, according to PYMNTS. 

Already, fintechs like Shopify and PayPal have launched or plan to launch new credit products to target small and medium-sized businesses, which are in the market for loans. A report conducted by PYMNTS and Enigma found that about half of SMBs plan to “shop” for credit in the next several months, with only about one-third considering large national banks. 

2. Fintechs and digital banks make significant headway in checking accounts

Consulting firm Cornerstone Advisors found that 47% of new checking accounts opened in 2023 were at fintechs and digital banks. In that same period, the megabanks’ share of checking accounts dropped to 17%, regional lenders’ dropped to 21%, and community banks and credit unions remained flat at 12%.

Compared to 2022, consumers seem to be opening more checking accounts. So far this year, 14% of Americans opened new checking accounts, compared to the 15% that opened accounts in the entirety of 2022. The percentage of Americans that consider megabanks their primary account provider is also declining across generations, while the percentage of Americans who consider a fintech or digital bank their primary checking account has risen.

The Takeaway: Banks can leverage fintechs’ know-how in marketing to consumers through embedded finance solutions.

Although the current trend of consumer behavior may seem worrisome for banks, it’s actually an opportunity for them to rethink how they can partner with fintechs.

Cornerstone Advisors Chief Revenue Officer Ron Shevlin said that, particularly among Gen Z and millennials, consumers’ definition of a primary financial institution has changed a lot. Instead of looking for a place to just store their money, consumers want financial tools that they can tailor to their needs–hence why fintechs and digital banks saw such a big jump in new checking account openings.

Shevlin specifically calls out fintech giants Chime and PayPal, which together accounted for 20% of all new checking accounts opened in 2023. Both of these companies rely on bank partners to provide services to their customers, but their success lies in their ability to understand their customers’ needs and provide them with desirable, sticky products such as Chime’s fee-free overdraft product, called SpotMe.

3. PayPal to launch AI-powered assistant for enhanced customer support 

PayPal, a leading payment processor, is set to introduce an AI-powered assistant aimed at combating fraud and offering financial assistance to users. The technology will be integrated into PayPal's consumer app, enhancing customer support and bolstering security measures. The official launch of the AI-powered assistant is scheduled for later this year.

The Takeaway: AI adoption is on the rise in financial services

PayPal's investment in AI technology is evident as the company embarked on over 300 AI experiments in the first half of the year, with a focus on improving efficiency, optimizing customer experience, expediting product launches, and developing proprietary AI models. 

Key players in the broader financial industry are also showing interest in AI, with large institutions like Citizens Bank, NatWest, Barclays, JPMorgan, and Citibank exploring AI's potential to streamline operations and optimize cost structures. Citibank has already announced plans to increase its investment in automation and AI, hoping it will  yield benefits in its cost structure. While the use of AI models poses benefits for banks, there may be significant concerns if leveraged without an appropriate risk framework in place governing the use of these models.

4. Instant payments system FedNow goes live

The Federal Reserve’s instant payments system, FedNow, went live on July 20. It will compete directly with The Clearing House’s Real-Time Payments (RTP). FedNow will allow participating institutions to send and receive payments within seconds, 24/7, 365 days a year.

To start, only 35 early-adopting banks and credit unions — including JPMorgan Chase and Wells Fargo, but notably not Bank of America or Citigroup —  as well as the U.S. Department of the Treasury's Bureau of the Fiscal Service, are ready with instant payments capabilities via the FedNow Service. In addition, 16 service providers are ready to support payment processing for banks and credit unions.  

The Takeaway: Wider adoption of FedNow and instant payments will take time

Financial institutions can eventually leverage FedNow to not only attract and retain customers but also grow revenue by offering new products and reducing costs by streamlining operations. Non-financial firms can instantly pay employees and even customers. With instant payments, businesses can have on-demand access to their funds and better manage their cash flow. Those benefits can also be passed down to the business’ customers, which can improve customer satisfaction. 

However, instant payments can also mean instant fraud. It’s important to reiterate, once again, that banks and fintechs need to have strong fraud controls in place, during both the onboarding process and payments process. Hence, achieving broader adoption of FedNow may require a measured and iterative approach over time, allowing financial institutions to thoroughly assess and refine the system's functionality.

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