Fed Issues Order to Evolve Bank Over Fintech Problems

The Federal Reserve Board issued an enforcement action against Evolve BancorpInc. and Evolve Bank & Trust, which provides so-called banking products as a service to fintech companies, for failing to comply with anti-money laundering, risk management and consumer compliance programs, according to a report declaration Today.

As part of the enforcement action, the Arkansas-based bank will have to strengthen its compliance with existing partners, including By Now Pay Later fintech giant Affirm, which earlier this week announced a partnership with Apple. Affirm declined to comment. As of April, Evolve had client funds associated with hog slaughter scams seized. It also provided banking services for fintech Synapse Financial Technologies, which went bankrupt in May. It also works with banking fintech Mercury, which provides banking services for startups.

“For current partnerships with financial technology companies, the Board’s action requires that Evolve strengthen its risk management practices to address potential risks,” according to the Fed statement. “Including compliance and fraud risks, implementing adequate oversight and monitoring of such relationships, including through strengthened procedures related to recordkeeping and consumer compliance programs.”

Konrad Alt of regulatory consultancy Klaros Group says many major players providing banking products as a service are subject to formal or informal enforcement actions. But “each of these orders contains some regulatory innovation. Banks that find themselves in this space will want to read the Evolve order carefully to see if it has implications for them.” In 2023, banking as a service accounted for 13.5% of “severe enforcement actions” issued by federal banking regulators, second at S&P Global Market Intelligence.

According to the statement, the Board’s enforcement action against Evolve is independent of the bankruptcy proceedings regarding Synapse.

In an email to Fortune, an Evolve spokesperson acknowledged that the company had signed off on receipt of a formal order from the Federal Reserve Board and the Arkansas Department of State Bank and had agreed to take certain steps to “further strengthen” compliance oversight and risk management practices.

“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 wrote. “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.”

According to the Fed, the action resulted from reviews conducted in 2023 that found that Evolve failed to put in place an effective risk management framework for its partnerships and did not maintain an effective risk management program. This was not part of a formal investigation.

Evolve called the reviews part of a “routine regulatory review” and said the order was similar to what other players in the banking as well as services sector also received. That statement said the Fed’s order “does not affect our existing businesses, customers or deposits. Evolve remains well capitalized and continues to show strong growth across all lines of business.”

Evolve’s board of directors has 90 days to submit a written plan to strengthen the board’s oversight of the bank’s management and operations and the bank’s compliance with the Bank Secrecy Act and other anti-money laundering regulations.

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