Under the Hood season 2 continues. In this series hosted by Synapse founder and CEO, Sankaet Pathak, Under the Hood takes a deep dive into various challenges and opportunities in FinTech. Topics range from technical design and architecture to regulatory and policy challenges.
Episode 3 takes a thorough look at the recent agreement between Blue Ridge Bank and the Office of the Comptroller of the Currency (OCC). Sankaet is joined by Kevin Herrington, the president and CEO of Lineage Bank, and Neil Peretz, the Chief Legal Officer of Sawa Credit and an early architect of the Consumer Financial Protection Bureau, Office of Enforcement. They comb through the consent decree, share perspectives, and discuss the impact of the ruling on other banks and fintechs.
Here are some of the key takeaways:
A Detailed Review of the Consent Decree
Neil began by reviewing each article of the consent decree, breaking it down in its entirety. Sankaet revealed that after reading the document and seeing the public commentary, he couldn’t see what was so egregious about it because the order seems to be asking for basic requirements, basic infrastructure that a bank has to set up if they're going to be operating programs through third parties.
Why Such Fundamental Instruction in the Consent Decree?
Sankaet highlighted that the OCC’s commentary was not about inadequacies, but more fundamental, like some of the essential compliance capabilities weren’t in place. How could Blue Ridge Bank be in this business without some of these fundamental capabilities that the OCC outlined? Neil suggested that the bank may have been oriented to do business with local customers where it is easy to know your customer, but then the fintech expanded outside of that community where it is much more difficult to know your customer.
Fintech & Bank Partnerships are a Win
Neil shared that banks partnering with fintechs represented an opportunity for banks to up their game. Some fintechs, or Banking-as-a-Service (BaaS) companies, have been making investments in automating compliance essentially, benefiting the bank. He explained that banks could get a snapshot from their fintech partners who in some cases have up-to-date systems to track certain transactions or verify identities. A single bank would not have access to those programs but they would through a fintech partner.
Should BaaS Be Regulated?
From a know-your-customer perspective, Kevin called out that there is a distinct difference between what Lineage Bank does for a customer that walks into a branch versus what they do for a customer onboarded through a fintech. “It is appropriate to have separate policies that govern that.” Neil shared that in fact consumer protection laws and others apply whether you’re a bank or not. So fintechs are regulated. He also offered examples of Institution Affiliated Parties (IAP) where IAPs are affiliated with a regulated institution like a bank so you can be regulated too by affiliation.
Support for the Consent Decree
Sankaet spotlighted that he thought the OCC order was fair and right and there are some obligations that the BaaS provider should be helping the bank with as well. The group posed the thought that the decree may have been written as a checklist for everyone.
Is This the Beginning of a Consent Decree Trend?
Neil believes that there will be more scrutiny but those fintechs that have made the investment in infrastructure will fair better. Kevin hopes to see a trend so more banks will pursue fintech partnerships and there will be more regulation.
To learn more listen to episode 3 of the Under the Hood podcast.