“Financial infrastructure rarely becomes visible until it breaks,” a sentiment underscored at Wednesday’s House Financial Services Committee hearing. The session, titled “Partnering for Innovation: How Bank-Fintech Collaborations Enhance Financial Infrastructure,” brought together lawmakers, banking, and FinTech executives to confront an increasingly urgent question: How do banks modernize through API connections, embedded banking models, and AI-driven operations without relinquishing the fundamental responsibilities of a regulated institution? Testimony before the subcommittee on digital assets, financial technology and AI illuminated the central role of these partnerships in delivering financial services, yet witnesses diverged sharply on whether current oversight frameworks are fostering the right incentives or inadvertently allowing risks to outpace supervision.
The Evolving Landscape of Bank-FinTech Partnerships
Alexandra Steinberg Barrage, a partner in the Financial Services Group at Morrison Foerster and former FDIC associate director, highlighted the rapid evolution of these partnerships since the banking-as-a-service (BaaS) boom accelerated in 2021. She testified that these collaborations represent “a significant opportunity to expand access to financial services, modernize payments infrastructure, and enhance U.S. competitiveness.” However, Barrage cautioned that such opportunities necessitate “sustained and robust compliance frameworks and oversight, subject matter expertise, and targeted reform.”
The discussion extended beyond mere customer-facing applications. Sheetal Parikh, general counsel and chief compliance officer at Treasury Prime, clarified the underlying architecture, describing APIs as standardized interfaces enabling secure, real-time information exchange between banks and FinTechs. Crucially, Parikh asserted that this architecture leaves the regulated institution “in control of deposits, compliance and payment activity.” She noted that community institutions, in particular, face challenges from aging technology, geographic limitations, and intense pressure from larger competitors capable of investing billions annually in modernization. Henrietta Thomas, executive general manager of advocacy, risk and compliance at Xero, echoed this, emphasizing that financial infrastructure—comprising accounting systems, payment workflows, payroll capabilities, and bank connectivity—is foundational for efficient business operations. Thomas underscored the symbiotic nature of these relationships, stating, “The collaboration between banks, FinTechs and Xero is not a feature of our business model. It is the foundation.”
Innovation’s Double Edge: New Risks and Accountability
The hearing’s tone shifted as discussions moved from the potential of partnerships to the critical implications when accountability falters. Steinberg Barrage pointed to the scaling of BaaS models, which led regulators to increasingly focus on deficiencies in Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance, third-party oversight, and operational controls. She cited recent disruptions that exposed weaknesses in account recordkeeping, reconciliation, and the ability to accurately track customer balances across interconnected platforms. Barrage warned, “In the absence of appropriate oversight, expertise and sound risk management, things can go colossally wrong, with grave risks to consumers and sponsor banks.”
Erica Khalili, co-founder and chief legal and risk officer at Lead Bank, offered a different perspective, asserting that partnerships are viable only when banks maintain “unquestionable accountability.” Khalili emphasized, “Lead owns the compliance stack,” clarifying that extending services through FinTech relationships does not diminish the bank’s obligations to consumers or regulators. Her bank’s due diligence, she detailed, spans data architecture, API controls, customer acquisition models, financial crime monitoring, concentration exposure, and consumer protection practices. Artificial intelligence (AI) emerged as both a significant benefit and a new layer of supervisory complexity. Steinberg Barrage cited examples of banks leveraging AI for AML and payments modernization. Subcommittee Chairman Bryan Steil, R-Wisc., during questioning, specifically inquired about the changing nature of bank/FinTech relationships, with Barrage highlighting digital assets and AI as focal points. She also noted banks are “banding together… to figure out how they are going to do tokenized deposits.” Thomas described Xero’s AI strategy as embedding automation directly into workflows like transaction reconciliation and cash flow management, always under human oversight.
Calls for Calibrated Oversight
A clear area of consensus was that the existing regulatory framework faces considerable pressure. Sheetal Parikh contended that current third-party risk frameworks were designed for traditional vendor relationships, not the embedded banking environments where technology platforms are integral to product delivery. She advocated for more explicit standards that differentiate infrastructure improving transparency from that which might reduce control. “The ask is not for less supervision,” Parikh stated, “It is for supervision that is calibrated to the actual risk profile of well-governed programs.” Khalili suggested the FDIC’s Emerging Technology Team as a potential model for equipping regulators with a deeper technical understanding of partnership structures.
Rep. Steven Lynch, D-Mass., reflecting on the evolution of banking oversight post-crises like the Great Depression and the global financial crisis, acknowledged the transformative potential of FinTech. However, he voiced concern about the “move fast and break things” culture prevalent in tech, particularly among AI and crypto firms that “do not want to be regulated.” Lynch questioned how to protect depositors and bank customers while integrating this “important and transformative” technology. Khalili responded that the bank-FinTech model is “massively accretive,” allowing FinTechs to manage “the distribution channel and the product innovation side.” Yet, she firmly reiterated the bank’s ultimate responsibility: “the bank… is where the buck stops.”
The House hearing underscored a critical juncture for the financial industry. While bank-FinTech partnerships offer undeniable avenues for innovation, modernization, and expanded financial access, they simultaneously introduce complex new risks that demand equally sophisticated and adaptable oversight. The challenge, as articulated by witnesses and lawmakers, is not to stifle innovation but to ensure that the regulatory framework evolves to provide clear, calibrated guidance, preserving the integrity of the financial system and protecting consumers as technology continues to reshape how financial services are delivered.
