Lawmakers weigh whether bank-fintech oversight is keeping pace with the risk
The question of whether supervision is keeping pace with the plumbing of modern banking moved to centre stage in Washington this week. At a House Financial Services Committee subcommittee hearing on 20 May, lawmakers, bankers and fintech executives examined how banks can modernise through partnerships without surrendering the obligations that come with holding a charter. For senior bankers, the relevant signal is not the rhetoric about innovation but the diverging views on whether current oversight is steering risk correctly or simply letting it move faster than examiners can follow.
The session, held before the subcommittee on digital assets, financial technology and AI and titled "Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure," treated partnerships as core infrastructure rather than a customer-facing feature. Alexandra Steinberg Barrage, a partner at Morrison Foerster and a former FDIC associate director, testified that these arrangements have evolved rapidly since the banking-as-a-service surge of 2021. They offer "a significant opportunity to expand access to financial services, modernize payments infrastructure, and enhance U.S. competitiveness," she said, but only with "sustained and robust compliance frameworks and oversight, subject matter expertise, and targeted reform."
Where accountability sits
Several witnesses pushed back on the idea that partnerships dilute a bank's responsibilities. Sheetal Parikh, general counsel and chief compliance officer at Treasury Prime, argued that much of the public debate misreads the architecture, describing APIs as standardised interfaces that let banks and fintechs exchange data securely in real time while the regulated institution retains control of deposits, compliance and payments. Henrietta Thomas of Xero framed the same point from the small-business side, calling the collaboration between banks, fintechs and her firm "not a feature of our business model. It is the foundation."
Where it goes wrong
The tone sharpened when discussion turned to failure. Steinberg Barrage noted that as banking-as-a-service scaled, regulators zeroed in on Bank Secrecy Act and anti-money-laundering deficiencies, third-party oversight and operational controls, pointing to recent disruptions that exposed weaknesses in recordkeeping, reconciliation and tracking 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 of Lead Bank put the principle plainly, stressing that "Lead owns the compliance stack" and that extending services through fintech relationships does not reduce the bank's obligations to consumers or regulators. The unresolved question for the committee is whether the supervisory framework reinforces that ownership or quietly erodes it.
Source: PYMNTS.
