Fintech
FDIC Consent Orders Highlight FinTech Risk to Finance
It is well documented that banks and FinTechs collaborate on financial services innovation, where once they were primarily competitors.
But for banks that form partnerships with these digital-only players, regulators are weighing in, which could lead to new approaches to how such partnerships are forged and maintained – and, by extension, forcing banks to weigh risks and benefits.
Call it a review of the vulnerabilities inherent in the financial supply chain.
To that end, and as revealed in documents last week, the Federal Deposit Insurance Corp. entered. consent orders against two banks, Sutton Bank and Piermont Bank, last month. The orders highlight issues around third-party relationships and banking as a service.
Third party supervision
In its order against Piermont Bank, which is based in New York, the FDIC said: “The FDIC has considered the matter and has determined, and the Bank neither admits nor denies, that the bank has engaged in unsafe banking practices and uncertainties relating to” internal controls and systems appropriate to the “nature, scope, complexity and risk of its relationships with third parties”.
The FDIC also mandated that a review and evaluation be made of “the collection of sufficient data on the relationship with third parties, including the nature of the business arrangement and any associated banking activity or proposals for new banking activity and the expected volume of such activity banking. “
Separately, Sutton Bank was ordered to develop and implement a revised plan that “includes appropriate assessment and oversight, both initial and ongoing, of any entity or party that has entered into a business relationship or arrangement with the Bank… where any AML/CFT regulatory requirement or obligation of the Bank is outsourced to a third party” in accordance with the Bank Secrecy Act.
As reported in February, Michael Hsu, the acting comptroller of the currency, said in a speech that risk monitoring responsibilities become unclear when multiple companies with different incentives are involved.
“From a banking regulatory and microprudential perspective, our focus during this period must be to ensure that the safety and soundness of banks is maintained, that consumers are protected and that the playing field is level,” Hsu said .
And the intelligence of PYMNTS I discovered it last summer 65% of banks and credit unions have entered into at least one FinTech partnership in the past three years, with 76% of banks considering FinTech partnerships necessary to meet customer expectations. And as many as 95% of banks are focused on using partnerships to improve their digital product offerings.