Following increased regulatory scrutiny of bank-fintech partnerships and a series of recent enforcement actions, regulators are now seeking further guidance on how such partnerships should be managed.
Federal Deposit Insurance Corp. Executive Director Jonathan McKernan said at a conference hosted by Semaphore in Washington, D.C., on Wednesday that there is room for activity-specific advice under existing interagency guidelines on third-party relationships.
He said the guidelines could provide “clearer, even black-and-white rules.”Banks need to continually monitor whether their fintech partners are meeting their obligations and identify gaps, McKernan said, which he noted is often not done.
He did not comment on the impact of the Synapse bankruptcy case, noting that the facts are still in the early stages of development in that case, in which more than 100,000 customers have been locked out of their partner bank accounts due to disputes over user balances.
McKernan echoed comments made by Consumer Financial Protection Bureau Director Rohit Chopra earlier Wednesday about the challenges of governance of bank-fintech partnerships.
“A lot of banks are pitching themselves as the bank of choice for fintechs, but that can lead to a ‘move fast and break things’ mentality and situations where things aren’t neatly wrapped up,” Chopra said. “In some situations, that’s fine, but in other situations, like Evolve, [Bank]- Synaptic failure, it’s just tragic.”
McKernan said another concern in bank-fintech partnerships is the inappropriate use of the FDIC logo in fintech advertising. The agency finalized new rules in December regulating the use of official FDIC signs and advertising language. The rules clarified the agency’s restrictions on false advertising, misrepresentation of deposit insurance coverage and misuse of the FDIC name or logo.
“We do not want this issue to unfairly stifle innovation or entrench the position of incumbent banks, but some banks have used the deposit insurance issue and logos to confuse customers, to their detriment,” he said, adding that he expected regulators to “rigorously enforce” the rules.
The FDIC is a driver of innovation
McKernan argued that the FDIC can position itself as a driver of innovation in financial services through regulations that do not further entrench the position of incumbent institutions.
“Certainly, there’s a lot of potential for innovation to help lower the barriers to entry,” he said.
He noted that some of the largest financial institutions have dominant market positions tied to traditional payments and other systems that make them vulnerable to “creative destruction.”
The FDIC’s path forward in addressing cultural issues
McKernan, who along with Acting Comptroller of the Currency Michael Schuh led a committee overseeing an investigation into allegations of sexual harassment and other interpersonal misconduct at the FDIC, said the road ahead will be difficult and that a change at the top is needed to ensure reforms are implemented.
“If we don’t, I think it really calls into question our ability to deliver safety and soundness and consumer protection. [and] “We are committed to delivering on our financial stability mandate,” he said. “Our inspector general has identified talent issues, particularly talent retention, as one of our biggest strategic risks. If we don’t fix the real, serious and shocking cultural problems, these problems will get worse.”
