Fintech
Will the evolution reduce partnerships between banks and FinTechs?
THE Federal Reserve Board issued a “cease and desist” order against Evolve Bancorp and its subsidiary, Evolve Bank & Trust, which could have a chilling effect on bank-FinTech partnerships.
In addition to a series of corrective measures – focused on supporting what have been described as “deficiencies” in risk management and compliance – there is a particular focus on Evolve’s Open Banking (OBD) division and the publication of the termination from part of the Fed on Friday (June 14) The cease-and-desist order remains independent of Synapse’s ongoing bankruptcy proceedings.
Prohibition of new partnerships
In the read-across for the evolving FinTech ecosystem, the order notes that “With immediate effect, the Bank shall not, without the prior written approval of the supervisory authorities: (i) establish new fintech partners, branches, business lines , products, programs, services or program managers related to OBD, or (ii) offer new products, programs or services to an existing fintech partner, program manager or affiliate of OBD.
“All requests for prior approval must be made in writing and must contain, at a minimum, any proposed contract, any minutes of management, board or committee of the board approving the activity or relationship, a description of the applicable measures to effectively manage the risk posed by the business or relationship. Before concluding a relationship with a fintech partner, the Bank will conduct and provide the Supervisory Authority with an impact analysis on the Bank’s liquidity.”
Evolve, as indicated on its websitepartners with a wide range of FinTechs including Affirm, Bond, Stripe and others.
And it may be that the ban on new partnerships does two things: it limits growth – at least of Evolve itself, and it slows down at least some of the innovations that have been part of the promise of open banking… as regulators want to take a closer look at everything what is in the pipeline, to every contract, and must offer his stamp of approval and his signature.
This is in line with remarks made to Karen Webster last week by Amias Gerety, partner at QED Investors. During an interview about Synapse’s bankruptcy, Gerety noted that among the future paths for Evolve, “I think another bank will buy Evolve — or Evolve will be completely out of FinTech partnerships.”
Evolve is not alone in this case, as other BaaS and FinTech companies have received orders requiring stricter oversight of various policies, partnerships and risk management. We talked about it earlier this year that the Federal Deposit Insurance Corp. issued 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.
And as highlighted hereA number of companies have been sent “cease and desist” letters by the FDIC for violations of sections of the Federal Deposit Insurance Act, a list that includes Prizepool, AmeriStar and virtual wallet company Organo Payments.
A wide range of offers
Evolve’s OBD offerings include deposit accounts and payment processing services for financial technology companies. FinTechs, of course, offer products and services linked to these accounts and services to end users.
The order notes that reviews conducted by the Federal Reserve Bank of St. Louis and the Arkansas State Bank Department (ASBD) found risk management deficiencies within the OBD in August 2023 – and subsequent reviews in January of this year revealed further non-compliance with Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) regulations, as well as Office of Foreign Assets Control (OFAC) requirements.
Dated June 11, the order sets a 90-day window for Evolve’s board of directors to present a plan to “strengthen oversight” of the bank’s management and operations, specifically focusing on compliance with BSA/AML and OFAC regulations. Risk management practices must be improved, according to the order, including an agreement that Evolve will use an independent third party to conduct a thorough review of the OBD’s consumer compliance practices and implement necessary improvements.
With a nod to actual financial products, within 60 days of the order, Evolve must “improve” its loan and credit risk management policies, ensuring complete analyzes of borrowers’ repayment capabilities and the value of collateral. An independent third party must validate the effectiveness of the bank’s transaction monitoring system.
Additionally, the order imposes financial and operational constraints on Evolve Bancorp itself. The bank must submit a detailed cash flow projection for 2024 and subsequent years and obtain regulatory approval before declaring dividends, engaging in share buybacks or taking on new debt.
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