Bank failures must be a wake-up call for regulatory modernisation, says CEO of Cross River Bank

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.

PYMNTS recently put these questions to Gilles Gade, CEO of FinTech-focused Cross River Bank, to get his take on the modern environment and what needs to change.

Here’s what the challenger bank manager had to say.

PYMNTS: The Federal Reserveautopsy on Silicon Valley The bank’s error lays the blame partly 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’s own assessments?

Gilles Gade: The Fed appropriately conducted a comprehensive review of what caused these banks and their executives to lose their way, what an appropriate risk management framework looks like, what may have been missed by regulators, and what steps policymakers can take to better protect depositors, small businesses and our wider economy from sudden bank collapses in the future.

It is natural for pundits and politicians to point and direct the blame at a number of different stakeholders, but the conclusion of the Fed’s report was clear in one way: SVB utilizes 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 of supervision, while others see the failures as a canary in the technology sector and alternative banking coal mine. Who is right?

Street: Since [launch] of a new breed of FinTech after the Great Recession of 2008, legacy banks and regulators have been leery at best of modernizing the way Americans bank, borrow, spend and invest. Many are eager to say that banks born of technology are the problem and are the next to collapse. They couldn’t have been more wrong.

Not all FinTechs are created equal, and regulators’ resistance to embracing innovation and technology has had the double negative effect of holding back the growth of responsible technology-focused banks while allowing bad actors to slip through the cracks.

From FinTech’s perspective, we see developments in recent months as a golden opportunity to take long-term action to update our regulatory framework, which will open up innovative and responsible financial services to all Americans, especially those in underserved communities that have long been left behind . As we saw during the pandemic, FinTech’s ability to reach families and small businesses, especially underserved communities, was critical during the crisis.

PYMNTS: We at PYMNTS agree that innovation and technology play an incredible and increasingly important role within the financial sector. But what needs to be changed or developed to prevent future failures?

Street: As the largest provider of FinTech in the US, Cross River has been a leader in advocating for regulatory modernization. It hasn’t always been easy, and we’ve hit some bumps along the way, but we believe in the power of technology to empower all Americans to live their dreams. Responsible banking, compliance and transparency are central to our mission and we have made unprecedented investments to advance the dialogue with policymakers, regulators and consumer groups about the benefits of a strong bank/FinTech partnership model to continue to advance responsible Innovation.

All responsible FinTechs must evolve and adapt as the economic and regulatory environments shift. FinTech’s partner banks must continuously evaluate their partners’ compliance programs and ensure that their consumers are protected in the long term. Like traditional financial institutions, FinTechs must perform 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 placed on regulatory compliance, transparency, accountability and risk management, will emerge stronger from this crisis.

PYMNTS: One of the main criticisms of the Fed’s oversight in the run-up to the SVB’s failure was that the agency’s regulators were asleep at the wheel, and the situation worsened when the banks did not heed any of the warnings they received until it was too late. Where is the stress on responsible behavior and its enforcement, especially as lending partnerships become more widespread?

Street: Federal regulators must work in partnership with responsible banks to create a clear regulatory path for these lending partnerships. Regulatory guidance has been proposed but never adopted. In addition, lending partnerships are currently subject to a variety of state-by-state true lender and other laws, regulations and enforcement challenges. This patchwork creates an unreliable and useless path to consistent compliance and creates glaring loopholes 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 the Office of the Comptroller of the Currency to understand new activities and ensure that their examination teams have dedicated personnel to engage in these activities is helpful, but additional examiner training at all federal and state regulatory agencies is needed to ensure that agency officials can appropriately screen the banks that are appropriately mitigating risk from those that are not. Unfortunately, in times of crisis, regulators and consumer groups tend to falter [out] the baby with the bathwater.

For example, crypto innovation has experienced growth over the past decade, and it took politicians and regulators a very long time to embrace much-needed regulation. Unfortunately, the market caught on and it was too late. Now they overreact to correct what is right and wrong, instead of dwelling on mistakes.

PYMNTS: Innovation continues to evolve faster than the legal frameworks that regulate its impact, as we learn again and again every time the modern environment is dealt with a fundamental disruption. What approaches can regulators take to keep pace with next-generation advances, including cutting-edge technologies such as artificial intelligence (AI)?

Street: Federal regulators should demonstrate how they encourage consumer-friendly innovations, such as artificial intelligence and machine learning. As we saw with crypto, irresponsible businesses that did not enforce strict compliance and risk management principles (and unfortunately the customers and businesses that relied on them) paid a heavy price. We need to be ahead of the AI ​​curve to understand the benefits and risks of building 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 work 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 understand the world.” Now more than ever, our industry should learn from the few sudden collapses 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 each successive crisis, we never miss an opportunity to miss an opportunity. Time to learn our lesson.