Banks are regulated like utilities. We desperately need a new model.

Banks are treated more like utilities than innovators, and the industry desperately needs change. But the situation banks find themselves in is not entirely their fault. over regulation has created an environment where they can’t embrace new technology like other industries. While it’s true that banks need to get their act together from a governance, risk and compliance perspective, they also need to have better working relationships with regulators to improve customer experiences and shareholder value. Here’s the tricky part: Regulators and regulation have historically lagged behind innovation.

Innovation, regulation and compliance are at a crossroads in today’s banking ecosystem. Too many in the industry are focused on what happened in the past, rather than paying attention to what is happening today and tomorrow. Consider the situation that is taking place Citigroup for example. One of the world’s largest financial institutions was fined $136 million by regulators over a 2020 consent order that was not properly corrected from a compliance perspective.

On the other hand, look at Synapse, a fintech offering banking services this just went downThe lack of any regulatory oversight led to an estimated $160 million in user assets being frozen on the company’s platform due to Synapse’s issues. Citigroup failed to adopt the 2020 rules and regulations, and the Synapse issue was clearly not addressed in today’s regulations. Both examples, one focusing on a large traditional banking institution and the other on a new wave of fintech banking-as-a-service companies, illustrate regulatory challenges in different ways.

For banks to thrive now and in the future, they must embrace innovation and technology while ensuring alignment with strong regulatory guidelines and oversight. Demographics are constantly changing, and providing millennials and Generation Z with a better customer experience is a key focus for financial institutions.

Technology is a powerful asset for banks looking to attract customers to their ecosystem. Credit unions are excellent at this, but traditional banks are struggling with declining customer numbers, especially among millennials who rarely visit branches. To attract customers, banks must offer unique products, competitive rates and excellent customer service. Regional banks, the backbone of lending in the country, are exploring strategies to differentiate themselves. From banking-as-a-service models to innovative apps, banks are working hard to add value to their customers, but they are navigating uncharted and sometimes unregulated waters.

Technological advancements are rapidly developing in the banking ecosystem through channels such as artificial intelligence, banking-as-a-service partnerships, SAFE banking for marijuana and digital assets in custody. However, regulation has not kept up with these advances. Banks face numerous internal challenges that need to be addressed, and their success depends largely on the guidance they receive from regulators to implement effective internal compliance strategies. The fact that banks are willing to adopt these technological advances is a huge benefit, not only for the institutions themselves, but also for their customers and shareholders. However, banking regulations have stifled some of this needed innovation and left banks in a precarious position.

As banks try to evolve, regulators are left behind, with outdated regulations failing to address today’s technological and digital asset realities. Consider the cannabis industry: More than 30 states have legalized it in some form, yet banking remains a gray area. This billion-dollar industry is operating like the Wild West. Banks and regulators need a collaborative relationship that goes beyond consent and enforcement to true collaboration. Innovations like AI in customer service bring benefits to banks, shareholders, and customers, but also introduce challenges around governance, risk, and compliance. Regulation is here to stay, so a proactive relationship between banks and regulators is essential to navigating these complexities and improving service offerings.

Risk management and governance practices are also evolving rapidly. Technology is solving many problems, increasing productivity and efficiency, but human oversight remains essential. Effective risk management relies on a balanced integration of technology and human expertise. For example, some banks have thousands of employees but only a few compliance officers, illustrating underinvestment in this critical area. As regulators exert more pressure, banks are opening positions for chief compliance officers, compliance associates and anti-money laundering specialists. Institutions need to anticipate regulatory requirements, rather than react to them.

Federal Reserve Chairman Jerome Powell has warned that more financial institutions are likely to fail after the crisis that has hit Silicon Valley Bank, Signature Bank and First Republic Bank. A healthy banking system is essential to a healthy economy. While giants like JPMorgan Chase, Wells Fargo and Bank of America are considered too big to fail, smaller banks are in a precarious position. Part of the reason fintech and banking as a service have become so important is that smaller banks have no other option. They lack the resources and capabilities to innovate on their own, so they have to rely on trusted partnerships. There is an ecosystem developing to help smaller banks and credit unions innovate to improve customer experiences and shareholder value, but there is a lack of guidance and regulation.

If banks want to grow, they need to have a more collaborative relationship with regulators. And those same regulators will need to work with financial institutions to adapt and adjust the policies that currently apply in the current environment. The examples of Citigroup and Synapse show how outdated regulations or a complete lack of regulation can hinder progress and lead to serious problems. By working with regulators, banks can address these challenges and ensure compliance while supporting innovation. It is crucial for banks to move beyond being treated as utilities to becoming innovation hubs. This transformation will enable them to meet the changing needs of customers and communities and ensure long-term success. As banks strive to offer excellent services and products, they must also advocate for a regulatory framework that supports innovation and protects the interests of all stakeholders.