Banking-as-a-Service (BaaS) has hit its first coming of age moment. A few weeks ago, the OCC released their agreement with Blue Ridge Bank which sent a shockwave across the fintech and sponsor bank world. In the most forceful manner to date, regulators have made their concerns about fintech-bank partnerships known. Any doubt or room for interpretation left by the agreement was closed when Acting Comptroller of the Currency Michael J. Hsu weighed in at The Clearing House and Bank Policy Institute’s Annual Conference. Mr. Hsu made the OCC’s stance clear:
“The “de-integration” of banking services that is taking place now has its roots in technology, data, and operations and is affecting all banks, not just the large, money center banks. My strong sense is that this process, if left to its own devices, is likely to accelerate and expand until there is a severe problem or even a crisis.”
For the first time, a regulator has taken definitive actions towards a sponsor bank, specifically due to their Banking as a Service business. The BaaS industry has flourished, benefiting BaaS infrastructure providers, fintechs, and customers. Banks have also benefitted, capturing new revenue and deposits as well as consumers who now have access to more digital financial services.
The space has been accelerated by BaaS technology companies who have made it vastly easier to launch new financial products in a manner of weeks rather than years, decreasing the barriers to entry for both banks and startups. The BaaS trade is a simple one. The bank leases their banking license to a fintech, allowing them to create and market new accounts to customers they are uniquely able to reach and who rarely overlap with the issuing bank. The fintech relies on the bank to handle the “business of the bank”, including the regulatory, compliance, and risk functions while the fintech manages the customer relationships and uses bank APIs to execute financial activity.
Somewhere along the way, BaaS programs scaled, the lines blurred, and the roles and responsibilities got mixed. The “business of the bank” failed to keep up with scale and put institutions and the entire industry at risk. Mr. Hsu agrees:
“Banks and tech firms, in an effort to provide a “seamless” customer experience, are teaming up in ways that make it more difficult for customers, regulators, and the industry to distinguish between where the bank stops and where the tech firm starts”
At Alloy Labs, we have recognized the need for sober, grown-up management across the space. Our BaaS Center of Excellence published a nomenclature guide to help define industry standards. In the coming weeks, together with key partners from across the fintech and banking industry, we will be publishing a framework for establishing and managing the bank-fintech partnership roles and responsibilities, with the express intent of mitigating risks and maintaining compliance. We will continue to do our part in strengthening the industry by shaping good practices and policies.
Policies and practices are not enough to address the impending challenges though. We need tools that can scale compliance and risk management as effectively as BaaS infrastructure companies can scale partners.
Why we Invested in Themis
It is not often that you are lucky enough to invest in the right founder, who is building the right product, at the absolute right time, but we were lucky to do so when we invested in Themis earlier this year through our Alloy Alchemist Fund.
Themis is a Compliance Collaboration tool that simplifies the compliance management experience between a single bank and fintech, and magically scales to support all your fintech relationships, or - in the case of fintechs - all of your banking relationships. Themis simplifies the BaaS experience by bringing everything into one beautiful, powerful platform, accessible by partners or your team members. It supercharges the experience by encouraging the development of program standards and frameworks that can be applied to all partners. No longer does compliance need to play catch-up. Now they can be central, proactive partners in the proliferation of partnerships.
Themis was founded by Neepa Patel. Neepa has deep expertise in financial services compliance and regulation, holding positions on each point of the spectrum as a bank regulator, bank compliance officer, and fintech compliance officer. Neepa started her career as an OCC regulator throughout the credit crisis focusing on community banks. She then held compliance roles at Morgan Stanley and Deutsche Bank, where she headed US Regulatory Projects in Corporate Finance. Most recently, she served as the Chief Compliance Officer at R3, a blockchain fintech focused on direct, digital collaboration in regulated industries where trust is critical. Neepa has the rare ability to be able to view this problem from all the different angles, including from the regulator. She has built an exceptional team and product and is primed to scale her expertise for the benefit of banks, fintechs, and the regulatory bodies.
Neepa is the sober grown-up needed to help the Banking as a Service sector move into the next period of responsible growth. We are incredibly excited to back Neepa and the Themis team as they transform compliance across the financial industry.
Themis Wins Finovate Best of Show
Our investment is already starting to pay off as others are discovering the value simplifying governance, risk, and compliance to help accelerate partnerships between banks and fintechs. On September 13, 2022 attendees at Finovate Fall in New York voted Themis as a Best of Show award winner.
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Samer Saab is SVP of Product at Alloy Labs. We invest in companies reimagining financial services through our Alloy Alchemist Fund.