Regulators take a tough look at small banks' partnerships with fintechs

Small banks that partner with fintech companies can expect more governmental scrutiny of those arrangements, industry observers said in response to a recent enforcement action against a community bank in Virginia.

Under a public agreement last month with the Office of the Comptroller of the Currency, Blue Ridge Bank in Martinsville must bolster its oversight of fintech partners and improve its controls for the prevention of money laundering.

The move against the $2.8 billion-asset Blue Ridge comes as the OCC is focusing more attention on bank-fintech partnerships. 

Bloomberg

"There's every reason to believe it's symptomatic of wider increased scrutiny, at a minimum from the OCC," said Jason Mikula, a former Goldman Sachs executive who writes the Fintech Business Weekly newsletter on Substack.

Since last year, Blue Ridge has drawn criticism from consumer advocates over an arrangement with a fintech company to provide education financing that students repay with a portion of their income after joining the workforce.

But the concerns that sparked Blue Ridge's agreement last month with the OCC don't appear to be specific to the bank's involvement with student income-share agreements. At the end of last year, Blue Ridge listed 10 fintech partnerships, including one with a company called Aeldra Financial.

Until recently, Aeldra was offering U.S. bank accounts, in partnership with Blue Ridge, to non-U.S. citizens in India. The fintech touted its ability to open a U.S. bank account in 10 minutes for customers with an Indian passport.

Banks have obligations to know their customers in connection with efforts to combat money laundering, and Blue Ridge's agreement with the OCC requires the bank to monitor and control its anti-money-laundering risks, including those associated with fintech partners.

Aeldra, which was founded by a former East West Bank executive, now says in a notice on its website that it is winding down operations and that accounts established with Blue Ridge would be terminated after deposit funding was discontinued on Aug. 10. Various members of Blue Ridge's board of directors signed the agreement with the OCC just one week later.

Sukeert Shanker, who founded Aeldra in 2019, did not respond to requests for comment. Blue Ridge Bank CEO Brian Plum declined to comment.

As part of Blue Ridge's agreement with the OCC, it pledged to obtain a nonobjection from the agency prior to onboarding a new fintech partner. The bank also agreed to implement and adhere to a written program to assess and manage the risks posed by its fintech partnerships.

Regulation and compliance

OCC requires Blue Ridge Bank to improve monitoring of fintech partners

The Charlottesville, Virginia-based bank, which called off a merger this year after regulators raised concerns, said it "continues to cooperate" with the Office of the Comptroller of the Currency to improve its management of fintech partnerships.

By Polo Rocha

September 1

The OCC has been focusing attention on bank-fintech partnerships — arrangements that are sometimes known as banking-as-a-service — since the arrival of Michael Hsu as acting comptroller last year. Such partnerships take various forms, but they typically involve fintechs that need access to a bank charter for regulatory purposes.

In a speech last week, Hsu said that examiners need to be open-minded about new and innovative approaches by banks. But he also pointed to 2021 guidelines on the need for community banks to conduct due diligence of fintech companies, particularly those that have limited histories, and said that light-touch regulation is not the answer.

"This is not going to be easy and will require enhanced engagement, as we cannot simply adopt a lighter supervisory approach and expect less from community banks," Hsu said.

Many of the banks that partner with fintech companies are small, and some of them are not regulated by the OCC.

The OCC, the Federal Deposit Insurance Corp. and the Federal Reserve have all been paying attention to bank-fintech relationships over the past 12 to 18 months, according to a co-founder of Column Bank, a de novo institution that works with fintechs.

"Business models that people thought were sustainable two years ago may be different now," Column co-founder William Hockey said in an interview with American Banker earlier this summer. "We need to make sure that our risk tolerance is aligned with our regulators."

Todd Baker, the managing principal of Broadmoor Consulting and a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, said that partner banks have been ramping up hiring in risk management and anti-money-laundering compliance in anticipation of a more difficult examination environment.

Baker predicted that there will be a winnowing of banks that partner with fintechs as regulatory scrutiny increases. "If [banks] can provide a really compelling compliance solution, then that's a competitive advantage," he said.