In a memo released yesterday, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) have shared increased concerns over the relationships between traditional banks and financial technology (FinTech) companies.
This statement underscores the regulators’ intent to scrutinize the growing integration of technology into banking services, which has been both a boon and a potential risk to financial stability.
It also comes on the heels of multiple enforcement actions against banks in recent months, including Evolve Bank and Trust and Thread Bank, which are two of the largest banks supporting FinTech companies.
Growing Scrutiny Of FinTechs And Bank Partnerships
According to the statement, Federal banking regulators have been observing the landscape of bank-fintech collaborations over the past several years. These partnerships have allowed banks to leverage advanced technology to offer innovative products and services, enhancing customer experiences and expanding market reach. However, this integration has not been without its challenges.
The regulators’ primary concerns revolve around the operational and compliance risks that these collaborations entail. The Federal Reserve’s report highlights that while fintech partnerships can provide significant benefits, such as increased efficiency and access to new markets, they also introduce complexities that can strain a bank’s risk management frameworks.
Main Risks Facing Banks With FinTech Partners
The memo highlighted several areas where banks have been failing in regards to FinTech partnerships, and this was clearly seen with the Synapse collapse that has left thousands of Americans unable to access their funds for months.
Operational Complexity and Accountability: The integration of fintech solutions into banking operations can lead to heightened levels of operational complexity. This complexity stems from the need to reconcile different systems and processes between banks and fintech firms. Additionally, there is a concern about the clear allocation of accountability, especially when consumer-facing services are managed by fintech companies rather than the banks themselves.
Compliance and Consumer Protection: Ensuring compliance with federal regulations, including those related to consumer protection and anti-money laundering (AML), is a significant challenge. The report notes that fintech companies often control the customer interaction, which can complicate the banks’ ability to oversee compliance effectively. This raises potential risks of non-compliance with regulatory requirements, leading to possible legal repercussions for the banks involved.
Rapid Growth and Risk Management: Many banks have experienced rapid growth due to these fintech partnerships, particularly smaller community banks. While growth can be advantageous, it can also lead to risks if banks’ compliance and risk management systems do not scale accordingly. The influx of new customers and transaction volumes can overwhelm existing systems, leading to potential lapses in service quality and regulatory compliance.
Misrepresentation Of Deposit Insurance Coverage: Many FinTechs partner with banks in order to offer pass-through FDIC deposit insurance coverage. This type of coverage has been marketed heavily to consumers, who believed their money was safely insured at these companies. However, the insurance coverage may not apply, as we are currently seeing with Synapse. The regulators highlighted multiple times that bank partners need to ensure the accuracy of any advertising of coverage along with ensuring the steps to maintain coverage are in place.
Future Guidance
The OCC, Federal Reserve, and FDIC are seeking public comments on various aspects of bank-fintech arrangements. They aim to gather insights on effective risk management practices and the potential need for enhanced supervisory guidance.
In a separate statement from Governor Bowman, she summarized the key issue: “We have seen that these relationships can pose significant risks to banks and their customers, including retail deposit customers who reasonably expect that their deposits will be insured and that their banking services provider will comply with all applicable laws, including consumer protection laws.”
It’s clear the government is taking steps to address these issues, but it’s also a signal that FinTech companies many face increasing pressure in the coming months. It could also be an existential threat to non-bank FinTechs, who will either be forced to become banks, integrated into existing banks, or cease to exist.
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