Banking, Technology, and Instability

The business of banking is under threat from the forces of technological disruption. Banks have long outsourced critical technology functions. Yet as technology has become more critical to the business of banking, a new breed of technology-driven “fintech” platforms have started to flip this conventional outsourcing script. Rather than banks outsourcing technology, these fintech platforms are instead outsourcing core elements of the banking franchise like deposit-taking, credit and debit card issuance, and payments. This “banking-as-a-service”—or BaaS—model is rooted in the comparative technological and organizational advantages these platforms enjoy over traditional banks. Yet it is also deeply rooted in regulatory arbitrage.

This Article shines a spotlight on how the business model instability unleashed by the shift from conventional bank outsourcing to BaaS has contributed to growing instability in customer expectations regarding the scope of the financial safety net, and hence the legal protections to which these customers are entitled. It then explores how this combination of business model and expectations instability could trigger or amplify bank runs and, perhaps one day, even more widespread banking panics. The Article concludes by identifying and evaluating potential policy reforms targeting this triple cocktail of instability: ranging from relatively modest changes to bank recordkeeping requirements, to new liability rules for bank-fintech partnerships, to more fundamental reforms to the perimeter of bank regulation and the scope of the financial safety net.