The Potential of Bank-Fintech Collaboration for AI

Banking Ex Machina: The Potential of Bank-Fintech Collaboration for AI.

Banks have thus far remained cautious to develop, adopt, and integrate generative artificial intelligence (Gen AI), large language models (LLMs), and other similar innovations, such as agentic AI, into their business and operations—and potentially with good reason. Many of these technologies remain prone to “hallucinations” (generating false information with a sense of authority) or include various inconsistencies in their responses. Banks must also consider and address various legal, regulatory, and risk management issues arising from their potential use and integration of AI technologies. These issues run the gamut from cybersecurity, information security, systemic risk, and continued compliance with consumer protection laws, many of which will need to be integrated into banks’ policies, procedures, and control processes.

However, the dam may soon break. The Trump Administration has signaled an embrace of Gen AI and similar innovative technologies, as reflected in the “Removing Barriers to American Leadership in Artificial Intelligence” Executive Order, marking a shift away from the guarded approach of the Biden administration. The technology is also maturing quickly, and despite certain hurdles specific to Gen AI, LLMs, and similar technologies, banks have extensive experience onboarding and adapting their businesses to innovative technologies. According to one study, Gen AI could add between $200 to $340 billion in annual revenue—largely from increased productivity. At some point, it may become a competitive imperative to integrate this technology, at least for certain realistic use cases, including compliance, fraud detection, and certain customer service enhancements.

But how will banks adopt and integrate this technology on a widespread basis? Although certain banks will develop internal Gen AI technologies, many banks will not have sufficient resources, whether financial or internal talent. One possible alternative vehicle for the proliferation of Gen AI throughout the banking and financial services industry, as suggested in a recent speech from Governor Barr, is through bank and fintech partnerships. Banks and fintech companies may be able to develop symbiotic relationships in this regard. While fintech companies have cleaner tech stacks and can operate at speed in developing and integrating innovative AI solutions, banks have deep reserves of data and business information that can train and ensure the effective application of these technologies. In order to effectively work with banking organizations to develop and integrate AI solutions, fintech companies will need to understand the specific regulatory and risk management environment in which banks operate with respect to their AI usage. Fintech companies that are already involved in arrangements with banks will be familiar with many of these considerations.

For example, in connection with arrangements with fintech companies, banks will need to engage in a rigorous third-party diligence process, as laid out in joint guidance from the banking regulators. This guidance currently remains on the books, despite pushback against it from some within the Trump administration and Republican congressional leaders. Nevertheless, in the context of Gen AI and similar technologies, specific wrinkles may arise. Banks may struggle to get sufficiently comfortable with a third-party technology without more information than fintech companies feel comfortable providing to avoid giving up the proprietary information—the “secret sauce”—underlying the technology. Such issues, and many others, such as use and ownership of consumer-related data, will need to be carefully considered and resolved before these arrangements can proceed in earnest. Many can likely be managed through contractual negotiations.

In addition, banks and fintech companies may seek to invest in one other in connection with the development of innovative AI technologies and use cases. To do so, each party will need to carefully navigate bank regulatory frameworks regarding the permissibility, authority, and any approvals required for such investments.

Gen AI, LLM, and similar innovative technologies offer exciting opportunities for the financial sector, and may be made possible through bank-fintech arrangements. However, many knotty legal, regulatory, and practical issues will need to be considered and managed to ensure the success of these arrangements—fortunately many of which will be familiar, although with slightly different overlays.

About the Authors.

Stanley F. Orszula, Partner, BFKN Financial Institutions Group

Stan has extensive experience providing strategic counsel to banks on fintech agreements and partnerships, including BIN sponsorship, Banking-as-a-Service (BaaS), embedded finance, compliance and regulatory issues, digital assets, general banking corporate matters, lending issues, distressed loans and assets, and failed bank receiverships. Stan’s background includes experience as a counsel with the FDIC, sitting on the board of a financial institution, and representing banks in private practice for over 20 years. Banks rely on his unique perspective to navigate today’s complex regulatory environment and in implementing new technology, products, and services.

Caitlin E. Hutchinson Maddox, Associate, BFKN Financial Institutions Group

Caitlin advises banks and other financial institutions on a broad range of regulatory and transactional matters. Clients value Caitlin’s strategic approach to complex legal issues and ability to navigate regulatory frameworks. Caitlin focuses her practice on advising banks, fintechs, and other financial services companies on bank regulatory and other financial regulatory matters, including authority and control issues, affiliate transactions, consumer protection issues, and regulatory reform. She has experience serving as regulatory counsel on M&A transactions, capital market offerings, investigative and enforcement actions, and remediation matters.

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