The regulatory path to modern banking services

An exciting suite of modern banking services already exists in the US, with fintechs and FIs alike working to offer intuitive and productive assistance to their clients. But these services represent just a fraction of the banking services that businesses and consumers encounter on a daily basis. 

Lawmakers have concrete ways to improve banking services writ large, delivering more reliable and impactful experiences for constituents in the process. 

Incumbents vs. challengers

The US banking landscape is defined by a short list of giants and a long list of small players like regional banks and credit unions. While this means that regulators have large institutions to turn to when smaller banks struggle to survive—as in the case of JPMorgan and First Republic—this dynamic can also contribute to stagnant operations, where giants have relatively little incentive to innovate, and challengers struggle to match the deep pockets of larger competitors.

Though the prospect of shrinking the largest banks in the US faces serious pushback from the sector’s power players, such an outcome could lead to greater differentiation among leading banks—in terms of product innovation as well as superlative services.

Open banking

The regulations the US has enacted to create more modern banking services and products have been slow to take shape. Most notably, Section 1033 of the Dodd-Frank Act (2010), which enshrines a consumer’s right to their financial data—thereby creating an open-banking landscape—has only recently gained the full attention of regulators. 

Given the delay, market actors have arguably beat the government to the punch, creating their own standards-defining consortium, the Financial Data Exchange. In turn, regulators have to contend with existing private-sector open-banking infrastructure, which may complicate efforts to create the full portability and flexibility that open banking-powered services can offer consumers.

More regulatory muscle

Finally, the banks at the forefront of the banking crisis—SVB, Signature, and First Republic—were known for their modern banking services and unique products, which helped them grow their client list. However, these banks didn’t place the same emphasis on management as they did on their services. 

The fallout from the current banking crisis isn’t totally done, but it’s already clear that regulators lacked the enforcement power to transform their warnings into actual operational change; as the FDIC writes in its report on Signature Bank’s collapse:

FDIC could have escalated supervisory actions sooner…. There were opportunities for examiners to engage more frequently with bank management and the board and provide clearer, timelier messages to SBNY executives regarding identified weaknesses.

The Fed and the Government Accountability Office (GAO) come to similar conclusions discussing the other bank failures of this year. 

Consumers would benefit from the long-term survival of banks looking to innovate and provide modern banking solutions. This requires having the right oversight and enforcement frameworks in place.