Today, let’s talk about some of the recent banking as a service enforcement actions that we’ve seen issued by banking regulators. In the past several months, we’ve seen many enforcement actions pushed out in this area that’ve brought attention and concern to banking as a service relationships. Let’s review a few of the themes that we see in the consent orders and the enforcement actions that have come out. Then, we can examine some of the causes of the enforcement actions and what might be done to avoid them in the future. We believe these actions are avoidable and that banking as a service has a strong place in the financial services industry. We also believe that if properly managed and done well, these services can be a profitable and valuable relationship for banks and non-bank financial services providers. The following are some of the themes in these consent orders.
One of the themes we’re seeing in these consent orders is criticism of Bank Secrecy Act compliance and anti-money laundering, monitoring, and compliance. There is some pushback in the consent order on what has or hasn’t been done in those areas. There have also been specific instructions and directions to the board in these areas. One of the consent orders we’ve seen ordered the bank to go back and review transactions where they had missed filing suspicious activity reports. We believe this is telling of the types of issues that regulators are seeing in the banking as a service space. Another common item that we’re seeing in consent forms is instructions for the board to provide additional oversight over banking as a service activities. We believe that’s indicative of the bank not paying enough attention to its banking as a service offerings, not providing enough overall oversight, or possibly missing some things that they may not have initially thought of in their oversight program for the banking as a service offering.
INADEQUATE BANKING INFRASTRUCTURE
Many of these types of incidents can be largely corrected. Some of the underlying activity causing those enforcement actions to arise are from banks who have engaged in a large number of banking as a service offering type of relationships and don’t have the infrastructure to adequately review and provide oversight to manage all of these relationships. You have this multiplicative effect where these banks go and get a financial services provider that will have a lot of relationships with many different customers. Those customers are being brought in and usually have a direct contractual relationship with the bank. So, now you have this effect where you don’t have just one banking as a service relationship but many relationships. The bank now needs to be able to exercise oversight over dozens, hundreds, thousands, or tens of thousands of customer relationships. The bank may not have put all of the infrastructure, review, and oversight in place to manage those levels of customer relationships.
Think about it in terms of saying you want to offer a new deposit product. You’re going to have to make sure that you have deposit office staff. You then must also have a process and procedure in place for drawing in the deposit accounts, making sure all the documentation is in place, making sure you’ve identified the customer, and making sure you’ve gone through the beneficial ownership requirements so that everything is documented and set in place. You would then need monitoring programs, software, and systems where you can look at transactions and monitor for illicit activity. Think about it. That’s already fairly complicated on its own, but let’s take this a step further. Let’s take that programming and remove it one step from the bank and then place several hundreds, or thousands, or even more customer relationships under that sort of infrastructure. It’s a completely different kind of oversight, and it’s different from what the bank would be doing directly. This is where some of the lack of transparency is causing concern for regulators.
WHAT WE RECOMMEND
One of the recommendations we make to our clients when they’re contracting with banking as a service type provider or another very involved service provider is to ensure that they put the bank in the position of a regulator of sorts with respect to that relationship. The bank still needs to be able to receive policy and procedure, right? So, you need to be able to see, understand, and make sure that that relationship has correct, usable, and feasible policies and procedures so that the FinTech group can onboard customer relationships while you’re able to ensure they’re doing the risk management and the onboarding pieces correctly. These policies and procedures would also ensure they’re getting correct disclosures and agreements out to customers and that on the back end, they have enough infrastructure in place to monitor and oversee transaction activity, bank secrecy act concerns, fraud, and listed activity, and for anti -monitoring type concerns. The bank needs to be able to follow the policy and procedure, be aware of changes, and be able to monitor and check that those policies and procedures are being followed. If these policies and procedures are not being followed, the bank needs to be able to enforce them and say, “Stop this. You need to start this activity, and we need to make adjustments to have enough staff and oversight that it can actually operationalize and enforce this type of oversight.”
We understand that there are times when you may enter a relationship and get down the road a ways before realizing that some things need to be handled. We also understand that there are obviously other enforcement actions that we could take a look at. But, by and large, we believe that if a bank will take the position where they not only know and understand the process and procedures, and policies the FinTech organization is implementing, but also be in a position to oversee, monitor, and enforce these actions than these policies will go a long way to resolving some of the enforcement actions that we’re seeing today.
Farley Law specializes in working with both community banks and small businesses. If you are interested in learning more about these or any other income-generating activities for banks, please feel free to contact us at Farley Law, where we help our client financial institutions develop new products and financial services. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.