Published : 2 weeks ago, on 22/11/2024

Priority CEO Thomas Priore says his company is prepared to meet new regulations for the fintech industry.

While innovation and agility are hallmarks of fintech, the industry now faces a powerful shift as regulators move to keep pace with its rapid growth. Regulation is essential for safeguarding consumers and maintaining financial stability, but its implementation could be significantly disruptive. This is certainly the case for fintechs that provide banking solutions, according to Thomas Priore, founder and CEO of Priority.

The rapid expansion of fintech services has led to concerns about gaps in oversight. Regulators are expected to close these gaps, pushing fintechs toward the same level of scrutiny as traditional financial institutions​.

Established fintech companies have an advantage. Though not a bank, Priority has positioned itself over the past decade as a leader in banking solutions, often working with traditional banks to deliver services. Other fintech firms have attempted to do the same, but Thomas Priore said in a recent panel discussion that less proven companies are already getting phased out.

With more stringent regulatory measures on the horizon, banks have become more selective, opting for fintechs that demonstrate a strong value proposition. Priore credits Priority’s solid standing to its dual focus: harnessing technology’s capabilities and ensuring the resources to offer consistent, dependable products that can adapt to future regulatory demands.

“When building your product, you need to have made tech decisions early on to have a native stack that’s in the cloud, that’s very agile, that is efficient (insofar as time and cost) to make improvements on,” said Thomas Priore. “We’ve built with intention to do that, to provide stability and scale. And it’s the thing I’m most proud of, which allows us to punch above our weight.”

He adds that in the area of compliance, Priority is a licensed money transmitter nationwide. “The transactions that run through our licenses are reported to the regulatory authorities, every single one of them,” he said. “Getting and maintaining those licenses requires significant resources of money and time.”

Areas of Regulation Focus Likely To Include Security, Financial Stability

The potential for more stringent regulation is an issue the boards of every fintech should address in the very near future, according to a post on the Harvard Law School Forum on Corporate Governance. Security and proper licensing are two of the key areas of compliance expected to be under scrutiny. “Boards should expect that increasing interest in the fintech sector by U.S. financial regulators will spark questions — not least of all from investors — on how these areas are being addressed,” the authors advise.

Priority offers an example of how one successful company is managing these issues. Having achieved compliance with licensing requirements — Priority is a licensed money transmitter in all 50 U.S. states — Thomas Priore said the company also has focused on technology and security issues from its beginnings.

“We’re exceedingly rigorous around our security and our audit process. The way I would describe it is ‘money center bank quality,’” Thomas Priore said. “Our largest processing partner is Wells Fargo, whom we share a terrific relationship with because we do things to a level of expectation that a money center bank demands. That enforces a discipline we think is very, very important when you’re handling customers’ money. And we think other companies should take that responsibility just as seriously.”

Financial stability is another central concern as regulators evaluate new oversight for fintechs. One primary worry is liquidity risk. Unlike traditional banks, some fintechs operate without sufficient capital reserves, making them more vulnerable to sudden shifts in market conditions. Priority, which is experiencing growth and has been in business since 2005, has established itself as a strong player in the payments and banking solutions business.

Priority Has Prepared for Increased Fintech Regulation

In the panel discussion, Thomas Priore noted he and the leadership at Priority “actually want regulation, we want a rigor around operators in the space.” The intensified scrutiny will better protect consumers and also reward fintechs that have taken the steps to meet tougher requirements.

For some fintechs, however, particularly those in early growth phases, these regulatory pressures may present significant challenges. Companies that once prioritized speed and innovation over compliance may find themselves grappling with new requirements.

As regulations change, fintechs that have bank partnerships may face additional costs, potential operational delays, and more rigorous contractual expectations from their bank partners. With relationships already established with banks, Priority is well positioned in this area, too, Priore said.

He added that Priority has never taken the position of some fintechs that seek to displace banks. “There’s been so much talk in fintech of disintermediating banks. And I think that’s a mistake,” he said. “There are things that banks do very well. Banks are still the largest pool of assets globally. Why does it make sense to disintermediate a population like that?”

And banks have started to see the value of partnering with tech-driven, innovative companies, placing fintech “in a really interesting point in its evolution.” While banks began selling off payment processing businesses in the 1990s, that has now changed, he said.

“In the last five or so years, banks recognize payments as a source of fee-based revenue and deposits. And they’re trying to find ways to partner with fintechs to drive a customer experience that helps build that loyalty of deposit and fee income,” he said. “We’ve positioned ourselves to lean into that because we think it makes a ton of sense. And that’s not a disintermediating strategy; it’s a collaborating one.”