The Takeaway — September 2022

Every first Tuesday of the month we give you some of the most important and exciting embedded finance, fintech, and banking news stories and tell you why they matter. Find last month’s edition of the Takeaway here.

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1. FedNow (but in 2023):

The Federal Reserve has set its eyes on a mid-2023 launch for its instant payment system called FedNow. The payment system, according to the Federal Reserve, is poised to change how American consumers, banks, and businesses transmit funds.

FedNow, currently in a pilot program with select financial institutions, would allow businesses and consumers to send and receive money instantly at any time of day. This new rail differs from ACH  and wires, which generally can either take several days to settle or have limited settlement windows. With FedNow, funds can be sent and settled any day at any hour including outside work hours, on weekends, and on bank holidays. FedNow would also notify senders and recipients as soon as money is successfully sent and received during these times.

The Fed says that FedNow will play a crucial role for the economic wellbeing of many Americans from cash-strapped small businesses to consumers who are living paycheck-to-paycheck to all Americans who would be eligible to receive any kind of emergency financial relief.

FedNow will be available for financial institutions of any size.

The Takeaway: The ability to have same-day access to received funds is an important one already reflected in many fintechs’ list of consumer-first embedded financial services.

With FedNow having no restrictions on which financial institutions can adopt the payment system, it can enable even small community banks the ability to offer this financial service to prospective fintech and enterprise partners via banking as a service. FedNow could be an important step in leveling the banking playing field and broadening the services available to fintechs and ultimately their end users.

2. Bank branches on the decline:

A recent study from The Financial Brand finds that the number of FDIC-insured banks and bank branches will be at an all-time low in the next two decades. More precisely, the study projects that by 2042, there will be less than 2,000 banks, a far cry from the nearly 15,000 banks in 1983.

The banking space has gone through major peaks and valleys with the Great Depression to the Dot-com boom, but a consistent downward trend may be at hand. The study points out that medium-sized banks may actually be in the most danger as they may lack the lending power of larger banks and the lower fees of smaller banks.

What’s driving this banking plummet? Some experts point to bank mergers and fewer chartered banks entering the market. As we’ve previously discussed, the rise of neobanks may also be drawing consumers away from traditional banking institutions.

The Takeaway: So what can banks do to survive? Invest in technology partners.

Banks of all sizes operate on legacy tech that doesn’t afford them the speed and ability to innovate to remain competitive. Instead of overhauling their entire core system, banks can partner with banking as a service providers to enable them to readily work with fintechs and enterprises that present new and lucrative revenue channels. A BaaS provider like Treasury Prime is not only growing its network of partner banks, but is constantly in touch with best-in-class fintechs looking for bank partners. Banks can take advantage of the direct fintech relationship to find the best-fit fintechs to work with.

Are you a bank ready to innovate for the future? Our sales team is ready to talk. Contact us now. ‍

3. CFTC launches innovation office: 

As the crypto space continues to be embattled in regulatory ambiguity, the Commodity Futures Trading Commission has transformed its LabCFTC — an internal fintech team — into its new Office of Technology Innovation.

The office will be staffed by a team of specialists who are looking to provide regulatory clarity amidst yet-to-be solidified legislation from the government when it comes to digital assets and crypto.

This move comes as a senate bill aims to give the CFTC more oversight of the crypto space. It also comes at a time when government officials like Senator Elizabeth Warren are putting pressure on the Office of the Comptroller of Currency to tighten restrictions on banks offering cryptocurrency services. While the OCC finds its current procedures — allowing banks to work in certain crypto activities with written permission from its regulating office — is within the Biden administration's legislation, there are growing concerns over recent crypto blow-ups that the OCC may be overlooking.

The Takeaway: It’s not easy working in crypto these days. Regulation continues to be a controversial topic with some regulators accused of being overly aggressive while the government seemingly is slow to enact clear standards and procedures.

For crypto and digital asset firms, it is more important now than ever to align with bank partners who share the same vision and are best-prepared to ride any regulatory shockwaves that may be on the way. Look for a BaaS provider that can offer you a wide range of banks.

4. A look at fintechs’ effect on banking:

The OCC has put out a call for research into how fintechs and other nonbanking entities have changed the banking, lending, deposit, and payment landscape in this country.

As fintechs continue to balloon in popularity and with heightened scrutiny over their relationship with banks, the OCC is looking for academic and policy research that reveals what challenges lie in these relatively new partnerships.

The OCC is of course also curious about other fintech-bank areas like cryptocurrency and blockchain. The OCC will be looking into selected research materials in November.

‍The Takeaway: The regulatory landscape around fintechs will likely change as regulators put a more watchful eye on the space. We’ve previously discussed how fintechs can navigate these changes and how to best position themselves by owning their compliance.

Alongside this solicitation for research from the OCC, the Consumer Financial Protection Bureau has already invoked its dormant authority to oversee non-bank entities. It appears the regulatory grip on fintechs is tightening and fintechs should be prepared.

Watch our latest webinar about innovating in today’s regulatory landscape with expert input from an innovation and regulatory government officer.

5. The Fed’s system for fintech service access:

The Fed has finalized its tiered system for evaluating if a fintech should have access to its accounts and payments services.

These payment and accounts services were previously offered to banks to allow for quick routing and storing of money, but as the fintech sector grew, non-banks also wanted access to those services. Earlier this year, the process by which fintechs would be granted access to these services was deemed ambiguous and unclear by some.

Now, this new tiered system aims to make the process much more transparent. However, perhaps unsurprisingly, the system would mean that fintechs in emerging industries like crypto would have a prolonged and more intensive vetting process.

The Takeaway: Account opening and money movement is the basis of fintech embedded financial services. While the Fed is working on new ways to facilitate money movement like FedNow, it may also become increasingly more complicated for fintechs to access and provide essential financial services themselves.

Fintechs should keep an ear to the ground as new regulations continue to transform and invest in a direct relationship with banks that can assist them in navigating these new ways of innovation. 

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