Fintech
Thread Bank Receives Latest FDIC Enforcement Action
2024 is quickly becoming the summer of consent orders for smaller banks.
This is because, with the news Friday (June 28) the one based in Tennessee Discussion Bancorp is now the last financial institution (FI) to be subjected to the Federal Deposit Insurance Corporation(FDIC), managing the operational, compliance and strategic risks that arise from third-party ties is a priority for both banks and their FinTech partners.
FDIC enforcement actions are typically made public on the last Friday of the month, and the order issued to Thread, a popular partner bank for dozens of FinTechs, is unique in that it explicitly calls out the FDIC’s Banking-as-a-Service (BaaS) bank ) and Loan-as-a-Service (LaaS) programs.
Dated May 21, the order requires Thread Bank to implement a series of corrective measures without admitting or denying unsafe or unsound banking practices. Corrective measures include establishing a more comprehensive third-party risk management program and establishing improved due diligence, monitoring and exit planning for Thread’s FinTech partners. This requirement reflects the regulator’s increased focus on banks’ relationships with technology companies.
“Within one hundred and twenty (120) days of the effective date of this ORDER, the policies and procedures of the Bank’s BaaS and LaaS programs shall be thoroughly and fully documented, addressing, at a minimum, the approval requirements of third-party partners and customer due diligence processes, growth and stress modeling, ongoing monitoring of AML/CFT compliance, and measures to unwind the lines of business of third parties, including FinTech partners,” the FDIC wrote.
FinTech and BaaS by Thread partner to include Unit, through which it is a supplier of 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’ 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 business, especially for FinTech startups with limited resources. By partnering with established banks, FinTech companies can rely on their partners’ strong 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 confines of regulatory requirements while focusing on innovation and growth. But the way things have played out so far hasn’t quite gone according to plan.
It was only 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 the final decision guide ON risk management linked to relationships with third parties.
Since then, the fallout from Synapsesit’s chaotic failure has put to the test the interconnection of the BaaS and FinTech landscape. To add 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 Jim McCarthy he told PYMNTS. “Too many people focus 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, the service hasn’t importance.”
to know more: Synapse’s collapse 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, formerly 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, according to FDIC call reports.
“With complex ecosystems, you have greater 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 can serve as a bellwether for how regulators are approaching the intersection of traditional banking and financial technology. 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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