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Is a regulatory tidal wave coming? 

The OCC, in addition to other US financial regulators, is focusing on risks arising out of bank-FinTech partnerships. Acting OCC Comptroller Michael Hsu expressed concern about the growth and convergence of bank products, FinTechs, Banking-as-a-Service providers and the big tech players. Hsu noted that it’s changing the financial industry landscape in a way that has a “nagging familiarity” to the lead-up to the 2008 financial crisis. Failure to act, he stresses, could lead to a severe problem or even a crisis. To address this, among other measures, the OCC may subdivide bank-FinTech arrangements into cohorts with similar safety and soundness risk profiles. This will enable the OCC to more clearly assess FinTech-related risks, and set management expectations. But what will change for FinTechs in a ‘riskier’ cohort? That’s still to be answered.

Why this matters. Many newer FinTechs have limited experience operating in a regulated market, and underestimate the importance of compliance controls. As such, added scrutiny on FinTech sponsor banks is likely to ‘chill’ the growth of bank-FinTech partnerships, and increase FinTechs’ compliance burdens and costs. However, the OCC is only one of several regulators focusing on this topic. It’s just the tip of the regulatory wave.