BANKING-AS-A-SERVICE: KEY CONSIDERATIONS IN MAINTAINING REGULATORY COMPLIANCE

The ‘digitalisation’ of banking – that is, the growth and introduction of technology and innovation into the banking sector – began more than a decade ago but has accelerated in recent years, reflecting the broader society’s increased reliance on and preference for technology-enhanced products and services over the same period of time.

Accompanying this digitalisation has been a trend toward deconsolidation and decentralisation of banking, wherein customers no longer rely on a single financial institution to be a one-stop-shop for all their financial needs and wants, but rather seek to obtain financial services from a broad range of niche providers that focus on improved, more timely delivery and the customer experience.

Deconsolidation and decentralisation, in turn, has led to increasing disintermediation of banks, a process that essentially removes a bank from its classic role as intermediary facilitating the connection between two market participants; instead, the participants can engage directly with each other. For example, in the payments space, distributed ledger technologies such as blockchain allow two parties to transfer value directly to one another without an intermediary such as a bank, which would have been impossible on a large scale just a generation ago.

As this process evolves, ‘banking-as-a-service’ has come into increasing demand as FinTechs and other non-banks realise the importance of partnerships with banks to enhance product and service offerings and operating efficiency.

Many FinTechs that found competitive success against traditional banks by offering niche financial products and services have come to recognise the value and importance to partnering with banks because: (i) banks serve as conduits to existing infrastructure, such as the Federal Reserve’s payment rails; and (ii) the partnership can provide a complementary suite of bank-like products and services that customers are demanding without imposing on the FinTech the regulatory, supervisory and compliance burdens associated with operating a bank.

Jan-Mar 2022 Issue

Skadden, Arps, Slate, Meagher & Flom LLP