The recent collapses of tech-friendly banks, including Silicon Valley Bank (SVB), Signature Bank, Silvergate Bank and First Republic Bank, have rightly caused a global conversation about the future of banking, and even more so, of financial services.
Here’s what the challenger bank chief had to say.
PYMNTS: The Federal Reserve’s autopsy on Silicon Valley Bank’s failure puts blame partially on its own doorstep, while separate regulator reports on Signature Bank’s collapse cite that lender’s “poor management.” What did you think of the regulator self-reviews?
Gilles Gade: The Fed appropriately conducted a sweeping review into what caused these banks and their leaders to lose their way, what an appropriate risk management framework looks like, what might have been missed by regulators, and what steps policymakers can take to better protect depositors, small businesses and our broader economy from sudden bank collapses in the future.
It is natural for pundits and politicians to finger-point and direct blame at an array of different stakeholders, but the conclusion of the Fed’s report was clear in one way: SVB leveraging technology and innovation to level the playing field and open up access to modern financial services for all Americans was not the problem.
PYMNTS: Some observers consider the bank collapses to represent a massive failure in supervision, while certain others view the failures as a canary in the tech sector and alternative banking coal mine. Who is right?
Gade: Since the [launch] of a new type of FinTech following the Great Recession in 2008, legacy banks and regulators have been skeptical at best about modernizing the way Americans bank, borrow, spend and invest. Many are eager to say that banks born from tech are the problem and are the next ones to collapse. They couldn’t be more wrong.
Not all FinTechs are created equal, and regulators’ resistance to embrace innovation and technology has had the dual negative impacts of holding back the growth of responsible tech-focused banks while at the same time allowing bad actors to slip through the cracks.
From FinTech’s view, we see the developments of the past few months as a golden opportunity to take long overdue action to update our regulatory framework, which will open up innovative and responsible financial services to all Americans, particularly those in underserved communities long left behind. As we saw during the pandemic, FinTech’s ability to reach families and small businesses, particularly underserved communities, was critical during the crisis.
PYMNTS: We at PYMNTS agree that innovation and technology play an incredibly and increasingly important role within the financial services sector. But what needs to change or evolve, in order to prevent future failures?
Gade: As the largest provider to FinTech in the United States, Cross River has been a leader in advocating for regulatory modernization. It hasn’t always been easy, and we have taken some hits along the way, but we believe in the power of technology to empower all Americans to live their dreams. Responsible banking, regulatory compliance and transparency are central to our mission, and we have made unprecedented investments in furthering the dialogue with policymakers, regulators and consumer groups about the merits of a strong bank/FinTech partnership model to continue to promote responsible innovation.
All responsible FinTechs need to evolve and adapt as the economic and regulatory environments shift. FinTechs’ partner banks need to be constantly evaluating their partners’ compliance programs and ensure their consumers are protected for the long term. Like traditional financial institutions, FinTechs must conduct robust due diligence and oversight and must stay in consistent and transparent contact with their regulators. Responsible growth is the key to a successful future for our industry.
Specifically, FinTechs that have sponsor bank relationships, where a premium is put on regulatory compliance, transparency, accountability and risk management, will come out stronger from this crisis.
PYMNTS: One of the key criticisms of the Fed’s oversight in the leadup to SVB’s failure was that the agency’s regulators were asleep at the wheel, and the situation was made worse when the banks did not heed any of the warnings they received until it was too late. Where does the onus on responsible behavior and its enforcement lie, particularly as lending partnerships become more prevalent?
Gade: Federal regulators need to work in partnership with responsible banks to create a clear regulatory path for these lending partnerships. Regulatory guidance has been proposed, though never adopted. In addition, lending partnerships are currently subject to a series of state-by-state true lender and other laws, rules and enforcement challenges. This patchwork creates an unreliable and unworkable path for consistent compliance and creates obvious gaps for consumer fraud and exploitation. A national standard will ensure that all banks, legacy and FinTech, can adopt a universal set of rules.
The ongoing work of the Federal Reserve and Office of the Comptroller of the Currency to understand novel activities and ensure their examination teams have dedicated staff for engaging with these activities is helpful, but further examiner training at all federal and state regulatory agencies is needed to ensure that agency officials can appropriately parse out the banks that mitigate risks appropriately from those that do not. Unfortunately, in times of crisis, regulators and consumer groups tend to throw [out] the baby with the bath water.
Case in point, crypto innovation experienced growth over the last decade, and it took policymakers and regulators a very long time to embrace much-needed regulations. Unfortunately, the market unraveled, and it was too late. Now they are overreacting to correct what is right and what is wrong, instead of zoning in on the wrong.
PYMNTS: Innovation perennially progresses faster than the legal frameworks regulating its impact, as we learn over and over again each time the contemporary environment is dealt with a fundamental disruption. What approaches can regulators take in order to stay in step with next-generation advances, including groundbreaking technologies like artificial intelligence (AI)?
Gade: Federal regulators should demonstrate how they are encouraging consumer-beneficial innovations, such as artificial intelligence and machine learning. As we saw with crypto, irresponsible businesses who did not impose strict compliance and risk management principles (and unfortunately the customers and businesses that trusted them) paid a heavy price. We need to be ahead of the AI curve to understand the benefits and risks of embedding it into our financial services system and have clear national standards and guardrails in place before AI is unleashed. Regulators should also ensure that smaller financial institutions have a clear regulatory path to partner with FinTechs to adopt these technologies so that they can remain competitive with their larger peers.
The famous quote is, “Trauma is an invisible force that shapes the way we live, the way we share, the way we reshape ourselves and the way we make sense of the world.” Now more than ever, our industry should learn from the sudden collapse of the few to make the many stronger. It should also now be abundantly clear to regulators that FinTechs are essential and ingrained in the American way of life. With every successive crisis, we never miss an opportunity to miss an opportunity. Time to learn our lesson.