Financial infrastructure rarely becomes visible until it breaks.
At Wednesday’s (May 20) House Financial Services Committee hearing on bank-FinTech partnerships, lawmakers, banking and FinTech executives explored a question that has become increasingly urgent as financial services move into API connections, as embedded banking models and artificial intelligence-driven operations become ever-more-commonplace: How do banks modernize without losing control of the responsibilities that come with being a regulated institution?
The hearing before the subcommittee on digital assets, financial technology and AI, titled “Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure,” illuminated how partnerships are becoming central to the delivery of financial services. But witnesses’ testimony diverged on whether current oversight is creating the right incentives or allowing risks to migrate faster than supervision.
Financial Infrastructure as Network
Alexandra Steinberg Barrage, partner in the Financial Services Group at Morrison Foerster and former FDIC associate director and lead policy expert for the Division of Complex Institution Supervision and Resolution, noted in her testimony that partnerships have evolved rapidly since the banking-as-a-service boom that accelerated in 2021. The partnerships, she testified, represent “a significant opportunity to expand access to financial services, modernize payments infrastructure, and enhance U.S. competitiveness,” but they require “sustained and robust compliance frameworks and oversight, subject matter expertise, and targeted reform.”
That infrastructure discussion extended well beyond customer-facing apps.
Sheetal Parikh, general counsel and chief compliance officer at Treasury Prime, asserted that much of the public debate misunderstands the underlying architecture. She described APIs as standardized interfaces that allow banks and FinTechs to exchange information securely and in real time while leaving the regulated institution in control of deposits, compliance and payment activity. Parikh indicated that community institutions increasingly face aging technology, geographic constraints and pressure from larger competitors that can spend billions annually on modernization.
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Henrietta Thomas, executive general manager of advocacy, risk and compliance at Xero, made a similar point from the perspective of small business operations.
Thomas described financial infrastructure as the combination of accounting systems, payment workflows, payroll capabilities and bank connectivity that determine whether a business can operate efficiently. Thomas emphasized that partnerships exist because each participant serves a different function.
“The collaboration between banks, FinTechs and Xero is not a feature of our business model,” she testified. “It is the foundation.”
Innovation Comes With New Points of Failure
The hearing became more pointed when discussion shifted from what partnerships make possible to what happens when accountability breaks down.
Steinberg Barrage noted that as banking-as-a-service models scaled, regulators increasingly focused on deficiencies in Bank Secrecy Act/Anti-Money Laundering compliance, alongside third-party oversight and operational controls. She pointed to disruptions in recent years that exposed weaknesses in account recordkeeping, reconciliation and the ability to accurately track customer balances across interconnected platforms.
“In the absence of appropriate oversight, expertise and sound risk management, things can go colossally wrong, with grave risks to consumers and sponsor banks,” she said.
Erica Khalili, co-founder and chief legal and risk officer at Lead Bank, framed the issue differently: Partnerships work only when banks remain unquestionably accountable.
She emphasized that “Lead owns the compliance stack,” and that extending services through FinTech relationships does not reduce the bank’s obligations to consumers or regulators. Khalili described due diligence that extends across data architecture, API controls, customer acquisition models, financial crime monitoring, concentration exposure and consumer protection practices.
AI emerged repeatedly as both a benefit and a new source of supervisory complexity.
Steinberg Barrage highlighted examples of banks partnering to deploy AI for anti-money laundering and payments modernization.
During questioning from House members, subcommittee Chairman Bryan Steil, R-Wisc., asked about the changing nature of the bank/FinTech relationships. Steinberg Barrage noted the focal points of digital assets and AI. In addition, “We are seeing banks band together … to figure out how they are going to do tokenized deposits,” she replied.
Thomas described Xero’s AI strategy as embedding automation directly into workflows, including transaction reconciliation and cash flow management, while maintaining human oversight.
Regulation Has Moved From Whether to How
If there was one area of consensus, it was that the existing regulatory framework is under pressure.
Parikh argued that current third-party risk frameworks were designed for vendor relationships, not embedded banking environments where technology platforms operate as part of product delivery. Her recommendation included a move toward more explicit standards that distinguish infrastructure improving transparency from infrastructure reducing control.
“The ask is not for less supervision,” Parikh said. “It is for supervision that is calibrated to the actual risk profile of well-governed programs.”
Khalili pointed to the FDIC’s Emerging Technology Team as one model for helping regulators develop deeper technical understanding of partnership structures.
With a nod towards regulation, Rep. Steven Lynch, D-Mass., contended that oversight of the banking system has evolved through the past several decades in the wake of crises such as the Great Depression and the global financial crisis earlier in the millennium.
“Now we have FinTech coming in,” he said, “and the culture is to move fast and break things,” Lynch said. He argued that tech firms across AI and crypto “do not want to be regulated … some of these companies are so big now that their influence is only increasing.”
He asked the witnesses about how to protect depositors and bank customers, “and yet onboard this technology that is important and transformative in many ways?”
Khalili responded that the bank-FinTech model is “massively accretive. In this model you have the FinTechs who are able to manage the distribution channel and the product innovation side.” But, she added, the bank (and in this case, her bank) “is where the buck stops.”
