How fintechs and banks can thrive in a new regulatory era

Laura Kornhauser is co-founder and CEO of Stratyfy, a firm that offers AI-powered predictive analytics and decision management solutions to small and medium-sized financial institutions.

Navigating regulatory change isn't just about staying compliant — it's about staying competitive.  

The regulatory landscape in banking and fintech is changing faster than ever. With a new administration, there is also an expectation that regulatory bodies will be friendlier toward innovation. 

To survive and thrive in this environment  — and in the future — financial institutions need to play the long game and build compliance structures and systems that are effective and efficient. 

Now is the time for financial institutions to seize this opportunity and modernize their compliance management systems, defining and putting into practice how they want to operate, compete and build trust with their customers.

The unintended costs of  ‘wait and see’

A passive, ‘wait and see’ approach is not an option for financial institutions right now. Unprecedented political whiplash can create significant challenges for financial institutions that rely on a stable regulatory environment. A shift in enforcement priorities can come with each new administration, which can cause confusion and uncertainty over where to focus compliance efforts. There is a risk in taking an overly reactive approach to regulatory changes, where companies adopt a whack-a-mole strategy instead of a longer-term, strategic one that prepares them for broader shifts in advance. A reactive approach can also come with considerable costs.

The rise of state regulation: A double-edged sword

With federal regulatory priorities shifting, states are rushing in to fill perceived gaps, particularly in areas like consumer protection, data privacy and broader fintech oversight. A patchwork of regulations can create regulatory fragmentation and uncertainty and an uneven playing field if state mandates don’t provide exemptions for smaller banks.

Banks and fintechs likely need to strike a balance between waiting for clear regulatory guidance before making costly compliance investments and proactively adopting safeguards to avoid penalties and reputational damage. Developing a flexible compliance framework isn’t about predicting every rule change. It’s about staying informed, utilizing modular policies, conducting scenario-based assessments and actively engaging with regulators.

Innovation in compliance: AI and fintech partnerships

Some banks are taking advantage of lighter-touch regulation by expanding riskier business lines like digital assets and non-traditional lending, knowing they may be curtailed later. Others are doubling down on more cautious strategies, expecting that competitors will overextend themselves and face scrutiny later. 

There is no one-size-fits-all approach to regulation. 

The key is to understand the regulatory cycle: Areas that don’t attract the focus of regulatory bodies today may invite stricter oversight when an administration changes. For example, the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in credit transactions, has a statute of limitations of five years from the date of the violation. This cyclical aspect and lookback period means that decisions today will be scrutinized for many years to come. But with compliance management systems that are durable and sustainable from one administration to the next — financial institutions can position themselves as longer-term winners.

With compliance top of mind for financial institutions, regulatory oversight has influenced the pace and structure of fintech partnerships. Under the current administration, bank and fintech partnerships are encouraged by leaders at regulatory agencies, emphasizing the value of innovation to drive financial inclusion. 

Notably, the OCC conditionally approved a fintech business model as a national bank.

“This conditional approval demonstrates the OCC’s commitment to a regulatory framework that supports innovations in banking that expand access to financial services for consumers and communities across the country, ” Acting Comptroller Rodney Hood said on March 17. This shift signals a more open environment for collaboration, potentially paving the way for further fintech innovation and banking competition in the space.

The future of consumer protection and fair lending

Striking the right balance between innovation and compliance has long been a challenge for financial institutions: too much rigidity stifles progress, while too little oversight can lead to unfair or risky lending practices. 

Lenders can reach more customers if they have the flexibility to adopt new technologies and methods, including machine learning-driven credit decisioning. To successfully make this happen, these tools need to offer sufficient visibility and control to comply with the lender’s policies and fair lending laws. 

This is already starting to happen with breakthrough machine learning solutions. 

As shown in FinRegLab’s recent study on explainability and fairness in credit underwriting — where Stratyfy was a research participant —  machine learning models often outperform traditional methods in predicting credit risk, particularly for individuals with limited credit history. This can expand access to credit for previously "unscorable" or underserved consumers — while helping lenders maintain accuracy and compliance. 

The current environment presents a unique opportunity for us to revamp existing fair lending regulations, making financial institutions more comfortable leveraging machine learning technology and alternative data to provide better outcomes for both their institutions and the communities they serve.

Even with more permissive AI oversight, legal and reputational risks may arise from negligence in consumer protection or the use of systems that unintentionally discriminate against them.

Managing what you can control

With regulatory changes constantly in flux, it can be challenging to distinguish between what’s noise and what could affect your company. 

It’s best to avoid reactionary compliance shifts and instead maintain the strong frameworks already in place or planned  — frameworks that match the culture, values and business objectives of your financial institution. The current environment presents an ideal opportunity to experiment responsibly, improve risk management, and enhance efficiency and consistency in how your processes are being implemented. While the industry waits for signals, it’s important to take the time to get ahead and prepare for a potentially fragmented regulatory landscape. By documenting any changes made during this period and focusing on sustainable growth and customer trust, institutions can remain resilient, regardless of political shifts.