Fintech
Fed hits Synapse partner Evolve Bank with cease-and-desist order
The Federal Reserve issued a cease-and-desist order Friday morning against Evolve Bancorp tied largely to its fintech banking partnerships, which include the now-shuttered Synapse Financial.
Bloomberg News
Regulators hit Evolve Bancorp with a cease-and-desist order related to its fintech dealings with third parties, which include the now-shuttered fintech intermediary platform Financial synapseimposing a series of requirements on the bank, including a ban on new fintech partnerships.
The Federal Reserve Board announced the action Friday against West Memphis, Ark.-based Evolve Bank & Trust, citing the community bank’s deficiencies in anti-money laundering, risk management and consumer protection.
Evolve was a major banking partner of Synapse, a middleware provider that sought to act as a bridge between chartered banks and non-bank entities that wanted to accept deposits and make loans. Synapse suddenly closed and filed for bankruptcy protection in April, freezing numerous transactions and leaving $85 million in customer deposits unaccounted for, under the company’s Chapter 11 bankruptcy proceedings.
The Fed noted that the action, issued Tuesday in cooperation with the Arkansas State Banking Department, was made independent of the bankruptcy proceedings.
An Evolve spokesperson confirmed that the bank signed the order and agreed to take various steps to improve its compliance and risk management functions, while downplaying the connection to recent events related to Synapse.
“This order, which arises from a routine regulatory review in 2023 and is similar to orders received by others in the industry, does not impact our existing businesses, customers or deposits,” the spokesperson said in a written statement. “Evolve remains well capitalized and continues to show strong growth across all lines of business.”
As a result of the order, Evolve will be required to review and revise numerous policies and practices, including those related to Bank Secrecy Act/anti-money laundering requirements and regulations within the Department of the Treasury’s Office of Foreign Assets Control, a which imposes the application of economic rules and trade sanctions.
The order also requires Evolve to develop a risk management plan for its Open Banking division, which targets fintechs and other emerging financial services providers. The bank is required to produce “written policies and procedures to identify, manage and monitor potential risks, including compliance and fraud risks, associated with each fintech partner, product, program, service, line of business or customer”.
The Open Banking Group is also prohibited from entering into new fintech partnerships or exiting existing ones without first obtaining written approval from supervisory authorities. Evolve will also need to review its governance system for these fintech models and create a program to handle customer complaints.
The 23-page order also calls for better management of lending and credit risk, interest rate risk, cybersecurity, customary due diligence as well as monitoring of suspicious transactions and activities.
The Evolve spokesperson said the bank welcomed the new requirements and supports “the modernization of regulatory guidance to ensure safe and convenient financial services.”
“We have made significant investments in technology and staff across our enterprise risk management, compliance and BSA/AML departments to strengthen oversight and improve the risk framework,” the spokesperson said. “With the support of our Senior Management and Board of Directors, we are confident that the impact of this Order will result in a stronger evolution.”
Founded in 1925 as First State Bank, the institution changed its name to Evolve Bank & Trust in 2005, according to the Federal Deposit Insurance Corp. banking database. It has 26 branches throughout Arkansas, California, Connecticut, Delaware, Georgia, Massachusetts, Maryland , New York, Oregon and Tennessee.
Through its Open Banking platform, Evolve partners with payment groups such as Affirm, Airwallex, Branch, Stripe and Tabapay. Other fintech partnerships include Alloy, Bond, Dave and Mercury.
Former Federal Deposit Insurance Corp. President Jelena McWilliams — who is serving as trustee for Synapse’s bankruptcy — said Evolve was unable to reconcile its deposits with Synapse’s ledger due to a lack of understanding of his system.
Evolve accuses Synapse of failing to provide the necessary documents, thus hindering the bank’s ability to “verify transactions, confirm end-user balances, and comply with applicable law.”
“Our primary goal is to ensure the protection of end-user funds. This becomes critical when essential reporting and information needed to process transactions does not come from Synapse,” the bank spokesperson said. “Evolve is actively working collaboratively with the independent U.S. trustee named in this matter and other partner banks to assist in determining the appropriate distribution of funds to end users.”