Fintech
Thread Bank Receives FDIC’s Last Execution Action
2024 is quickly becoming the summer of consent orders for smaller banks.
This is because, with the news Friday (June 28) based in Tennessee Discussion Bancorp is now the last financial institution (FI) to rejoin the Federal Deposit Insurance CompanyFDIC oversight and management of operational, compliance and strategic risks arising from third-party collaborations are of primary importance to both banks and their FinTech partners.
The FDIC’s enforcement actions are typically made public on the last Friday of the month, and the order issued against Thread, a well-known bank that is a partner of dozens of fintechs, is unique in that it explicitly calls out the bank’s Banking-as-a-Service (BaaS) and Loan-as-a-Service (LaaS) programs.
Dated May 21, the order requires Thread Bank to implement a series of remedies without admitting or denying unsafe or unsound banking practices. The remedies include establishing a more comprehensive third-party risk management program and establishing enhanced due diligence, monitoring, and exit planning for Thread’s fintech partners. The requirement reflects the regulator’s growing focus on banks’ relationships with technology companies.
“Within one hundred and twenty (120) days of the effective date of this ORDER, the Bank’s BaaS and LaaS program policies and procedures shall be accurately and fully documented, addressing, at a minimum, third-party partner and customer approval requirements, due diligence processes, growth and stress modeling, ongoing AML/CFT compliance monitoring, and measures to wind down third-party lines of business, including FinTech partners,” the FDIC wrote.
FinTech and BaaS by Thread partner to include Unit, through which it is a supplier for Relay, Toolbox, Sequin, Currence, Arpari and many other platforms.
“When vetting potential fintech clients, both Thread and Unit prioritize maintaining a strong focus on compliance and oversight,” Unit he wrote in a 2023 blog post.
Neither Unit nor Thread immediately responded to PYMNTS’s request for comment.
to know more: Payments executives say Banking-as-a-Service players have forgotten the banking part
FinTech risk in financial supply chains
Navigating the complex web of financial regulations is a daunting task for any company, especially FinTech startups with limited resources. By partnering with established banks, FinTech companies can rely on their partners’ robust regulatory frameworks, reducing the burden of compliance.
That, at least, was the hope of BaaS: a shared compliance model that allows FinTechs to operate within the constraints of regulatory requirements while focusing on innovation and growth. But the way things have unfolded so far hasn’t exactly gone to plan.
It was just one year ago (June 6, 2023) that the FDIC, the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued their final decision guide ON risk management associated with relationships with third parties.
Since then, the fallout of Synapsesit’s chaotic failure has severely tested the interconnection of the BaaS and FinTech landscape. Adding insult to injury, Synapse’s major banking partner, Evolve, last week (June 26) right away a major cyber attack, putting its risk controls under the spotlight.
“THE regulators I’m awake now”, Threaded CEO Mr. McCarthy he told PYMNTS. “Too many people are focused on the ‘as a service’ part — but they’ve ‘undermined’ the banking part, if at all… if you’re going to play in that space, I would say if you fail in banking, service doesn’t matter.”
to know more: Synapse’s downfall provides harsh lessons for its B2B partners
When the medium falls out of the middleware
PYMNTS Intelligence found last summer that 65% of banks and credit unions have entered into at least one FinTech partnership in the last three years, with 76% of banks considering FinTech partnerships necessary to meet customer expectations. And a full 95% of banks are focused on using partnerships to improve their digital product offerings.
And Thread Bancorp, which was previously known as Civis, already had a history of regulatory actions. The company’s recent FinTech partnerships have allowed it to grow rapidly, from less than $100 million to more than $720 million from the end of 2020 to Q1’24, based on FDIC call reports.
“With complex ecosystems, you have a higher advantage number of partners than you may have had historically” in the past, Larson McNeilCo-Head of Digital Markets and Ecosystems at JP Morgan Paymentshe told PYMNTS. This creates new considerations for the corporate treasury function, including managing those partners and counterparty risk.
The Thread Bank case could serve as a bellwether for how regulators are addressing the intersection of traditional banking and fintech. As the financial landscape continues to evolve, the key to leveraging the BaaS model lies in fostering strong, transparent, and mutually beneficial relationships between banks and fintech firms. In this way, they can collectively drive the future of banking toward greater inclusivity, efficiency, and innovation.
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