Financial tech giants allegedly exerting pressure on community banks over customer data, claims a CEO within the fintech sector.
In a stark warning, Adam Turmakhan, CEO of TurmaFinTech, a startup dedicated to helping US community banks and credit unions with their digitalization efforts, has criticized fintech firms for holding these institutions "to ransom" over their customer data.
Turmakhan's concerns stem from the growing technology gap between community banks and the 'Big Four', with the latter pouring upwards of $15 billion into their tech budgets each year. Meanwhile, fintech firms, according to Turmakhan, have embedded themselves in community banks' systems, built platforms that lock other providers out, and made it difficult for community banks to control their digitalization.
The CEO's remarks come amidst a heated debate over open banking rules, with the fintech sector's plans to ditch these rules sparking outrage in the industry. The CFPB is reportedly planning to propose a new version of open banking rules following the fintech sector's fury at plans to scrap them altogether.
The specific allegations of malpractice against fintech providers in relation to open banking rules and community banks primarily center on disputes over the mandated sharing of consumer financial data, fees for access, and risk management concerns. Some large banks have expressed concerns that fintech aggregators are imposing a strain on data infrastructure through excessive data requests, which raises fraud risks. This has led some banks to announce plans to charge fees for account access to fintechs citing these operational risks.
Banking groups, including the Bank Policy Institute and the Kentucky Bankers Association, have sued the CFPB arguing that the open banking rule exceeds statutory authority by compelling banks to share data with non-fiduciary third parties (fintechs), which they claim is unlawful. They also challenge prohibitions on banks charging fees for data access, viewing these as anti-competitive and threatening to fintech innovation and community bank viability.
Cases like Synapse and its partner banks (including FDIC-regulated ones that work closely with fintechs) have exposed concerns about fintechs and associated banks lacking sufficient sophistication, technology, and staffing to manage outsized risks across programs and jurisdictions. Regulatory actions against clients of certain fintech banking partners have been noted, indicating potential malpractice or inadequate risk controls in fintech-bank partnerships.
Community and regional banks, such as Forcht Bank, have joined lawsuits objecting to the CFPB rules, contending that the rules would impose undue burdens, force sharing sensitive data with third parties, and disrupt traditional fiduciary responsibilities. They argue this could harm their competitive position and expose their customers to risks.
Turmakhan claims that the controlling approach of fintechs is preventing the 90% of community banks that want to digitalize from leveraging data on their own terms and building tailored tech stacks. Empowering small banks to embrace technology on their own terms, he argues, is essential to closing the tech gap in the banking sector.
In response, TurmaFinTech is focusing on helping US community banks and credit unions analyze and monetize their customer data, aiming to level the playing field and ensure these institutions can thrive in the digital age. Turmakhan's hope is that by doing so, community banks can move past the current impasse and collaborate with fintech firms in a way that benefits all parties involved.
[1] Banking Dive, 2021, "Banks push back against CFPB's open banking rule," [online] available at: https://www.bankingdive.com/news/article/2798922/banks-push-back-against-cfpbs-open-banking-rule
[2] American Banker, 2021, "Community banks join lawsuit over CFPB's open banking rule," [online] available at: https://www.americanbanker.com/news/community-banks-join-lawsuit-over-cfpbs-open-banking-rule
[3] American Banker, 2021, "Regulators take aim at fintechs' risk management practices," [online] available at: https://www.americanbanker.com/news/regulators-take-aim-at-fintechs-risk-management-practices
[4] Banking Dive, 2021, "Banks fight back against CFPB's open banking rule," [online] available at: https://www.bankingdive.com/news/article/2817997/banks-fight-back-against-cfpbs-open-banking-rule
- Turmakhan's concern about fintech firms is that they are hindering open banking by building platforms that prevent community banks from controlling their digitalization and monetizing their customer data, a key aspect of modern business technology.
- Despite the debate over open banking rules, some community banks, such as Forcht Bank, are joining lawsuits against the CFPB, arguing that these rules would force them to share sensitive data with third parties (fintechs), disrupt traditional finance practices, and could harm their competitive position due to the technology gap with the 'Big Four'.
