Fed, FDIC and OCC Seek Information on Bank-Fintech Arrangements
Commentary by Thomas Delaney and Eamonn Moran
The Federal Reserve, FDIC and OCC issued a request for information ("RFI") on bank-fintech arrangements involving banking products and services distributed to consumers and businesses. The banking agencies also issued a joint statement highlighting risks to banks that are associated with the delivery of bank deposit products and services through third party service providers.
In the RFI, the agencies asked banks to, among other things, provide information on the data and information that they typically receive in bank-fintech arrangements, including those involving intermediate platform providers. The RFI also requested information on how banks and their fintech partners determine whether a customer is a customer of the bank, the fintech provider or both. Banks are also invited to provide information on practices they employ to manage risks associated with bank-fintech arrangements.
In the joint statement, the banking agencies focused on the risks that third party arrangements may pose with respect to deposit products. The agencies emphasized that the failure to perform ongoing monitoring and due diligence can undermine the integrity of a bank's deposit function. They also pointed out that fragmented operations can make it more difficult for banks to access risk, including whether all third parties perform functions as intended. End user confusion was also cited as a risk that can result from fintech partnerships. The agencies warned that marketing materials and other statements by third party providers can result in a mistaken understanding on the part of customers with respect to the level of deposit insurance available when access to funds may be dependent on third parties. They said, banks must (i) develop and maintain appropriate policies and procedures that include risk assessments, due diligence on service providers, effective management information systems that can be used to support third party compliance functions; and (ii) take steps to prevent a misrepresentation of FDIC coverage.
Comments must be filed 60 days from the date of publication of the RFI in the Federal Register.
In a statement, Federal Reserve Governor Michelle W. Bowman expressed concern about the ongoing regulatory approach to bank-fintech relationships, emphasizing that the guidance provided by agencies is fragmented and lacks clarity. She said that the disjointed approach does not adequately inform firms about supervisory expectations, particularly concerning third-party risk management. Ms. Bowman highlighted the potential risks these relationships pose, especially to retail customers who expect their deposits to be insured and services to comply with consumer protection laws.
Commentary
Third party service arrangements, particularly those involving partnership with fintech partners, have been a growing source of concern for federal bank regulators. The guidance and accompanying RFI reflect this trend and underscore points that regulatory officials have made about the need for financial institutions to pay particular attention to the state of their risk management practices in relation to fintech partnerships.
Two notable aspects of the guidance are (i) concerns regarding financial risks and (ii) those related to customer confusion. The guidance cautions that fintech arrangements may lead to funding concentrations that can make it more challenging for banks to manage and mitigate liquidity and funding risks, particularly when funding is deployed in illiquid or long-term assets. Customer confusion can result in several respects. First, it can be unclear from the customer's perspective whether they may be dealing with a bank or its fintech partner. Second, customers may assume that funds in the possession of a fintech partner are deposits that are FDIC insured, when that is not the case. In addition to paying particular attention to risk management practices in connection with fintech partnerships, the guidance underscores the need for banks to ensure that information provided to customers explaining such relationships is clear and accurate.
Commentary
In the joint statement, the federal banking agencies say they are reemphasizing existing guidance and that the statement "does not alter existing legal or regulatory requirements or establish new supervisory expectations." It is important to note that these agencies have issued a large number of enforcement actions in connection with these arrangements in recent years.
While the agencies have existing guidance relevant to bank-fintech arrangements, banks and fintechs alike have suggested that the agencies further clarify their supervisory expectations with respect to such arrangements. This point has recently been reaffirmed by several members of the FDIC Board, including Jonathan McKernan and Rohit Chopra.
As shown by the issuance of the RFI, the agencies are considering whether additional steps could help ensure banks effectively manage risks associated with these various types of arrangements, including enhancements to existing supervisory guidance.