Regulators Escalate Focus on the Risks of Bank Relationships with Fintechs and Other Third Parties

On July 25, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the agencies) issued a “Joint Statement on Banks’ Arrangements with Third Parties to Deliver Bank Deposit Products and Services” to “note potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users”. On the same day, the agencies issued a “Request for Information on Bank-Fintech Arrangements Involving Banking Products and Services Distributed to Consumers and Businesses” (the RFI)

The RFI “solicits input on the nature of bank-fintech arrangements, effective risk management practices regarding bank-fintech arrangements, and the implications of such arrangements, including whether enhancements to existing supervisory guidance may be helpful in addressing risks associated with these arrangements.” The comment period for this RFI has been extended through October 30, 2024.

In today’s podcast episode, hosted by Alan Kaplinsky, former practice leader and current Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, and featuring Ballard Spahr Partners John Culhane, Jr. and Ronald Vaske, we explore the significance of these agency actions, what they may portend for banks and their non-bank partners, and the agencies’ likely next steps and future areas of scrutiny. We also discuss tactics banks may want to consider in response to these actions and in preparation for potential future developments.

Topics addressed in this wide-ranging episode include the scope and coverage of the RFI; which banks and other entities are likely to provide information in response, and why; and the type of input that would be most valuable for banks to provide to the agencies. We review past agency pronouncements, enforcement, and other activity in connection with bank – service provider arrangements. We list and discuss in detail those risks to banks arising in connection with third-party relationships that cause regulators the greatest concerns.

We further provide some practical thoughts as to approaches banks may wish to consider now if they are contemplating a new fintech relationship, as well as ways to shore up practices and procedures in connection with existing third-party arrangements. We then conclude with some thoughts about how fintechs and other bank service providers should react to these agency initiatives