FinTech Compliance: Are Sponsor Banks Responsible?

• Post author By Ady
• Post date June 20, 2022
• Category Fintech

While FinTechs are now offering transactions as part of their service, they aren’t exactly banks and maybe that’s the reason they don’t have as big of a user base as they should. To grow themselves, they partner with a sponsor bank that moves the money between parties. This strategy allows FinTechs to focus on providing better services without them having to jump through hoops and become an official bank.

The sponsor bank is responsible for complying with anti-money laundering regulations and takes on the risks for customers and transactions under the FinTechs. The sponsor bank has to ensure that the FinTech they sponsor has a strong compliance program set in place. There must also be a seamless process for FinTechs to report any suspicious activities. The bank’s own compliance department can investigate and file suspicious activity reports (SAR). 

In January 2021, the OCC (Office of the Comptroller of the Currency) filed a complaint against “M.Y. Safra Bank” located in New York. The OCC found that they didn’t have an adequate compliance program in place, and when they became a sponsor bank for a FinTech, they failed to give proper consideration to the Bank Secrecy Act (BSA). Specifically, it failed to implement controls to keep up with the increased level of risk, while the bank wasn’t fined, they were ordered to cease and desist.

General Considerations While Building FinTech – Bank Compliance

Different financial services are subject to various laws and regulations, and a FinTech looking for successful bank partnerships needs to make some considerations.

1. Developing a Business Plan

The first step in offering financial services is the development of a business plan that covers the operational, legal, and regulatory guidelines. It is important to remember that even under a bank partnership model, certain states may require loan brokers, lead generators, loan services, and more to be licensed. 

2. Developing and Implementing a Compliance Management System

FinTechs will need to develop and implement a compliance management system, and a comprehensive and integrated compliance program containing written documents, functions, processes, and tools. These can help FinTech comply with legal requirements and reduce consumer harm resulting from violations of law. 

These types of policies are needed will depend on the nature of services offered by FinTechs.

3. Preparing to Partner

Once FinTechs develop business plans, a FinTech seeking to partner with banks needs to define the partnership goals. What does your business want from the partnership? Does FinTech want to own the customer relationship process or data? Does FinTech expect to diversify its business to include additional products moving forward? Not only should FinTech perform diligence on the potential bank partner, but it should also prepare for the bank to perform significant diligence. All of this allows FinTechs to have more control over the direction of the partnerships.

4. Finding the Ideal Partner

The key to finding success in any partnership is for both partners to find the right partners. When it comes to FinTech-bank partnerships, that means finding a bank that has ideal resources, knowledge, and flexibility. 

Similarly, a FinTech active in the small business credit industry may want to work with a bank partner with existing commercial credit programs. Once FinTechs find the right experience has been identified, it’s important to assess the bank’s pricing and ability to scale and help businesses grow.

5. Negotiating Service Provider Agreements

In many cases, a FinTech will need to work with other service providers to its bank partner to provide its proposed financial services. This can include executing contracts with services providers for AML screening, collection services, and call center support. It’s essential that these relationships be established within the framework of the bank partnership model.

Conclusion – FinTech Compliance

If a bank wants to be in a partnership with FinTechs, they have to ensure that those businesses have strong compliance programs. The internal policies must include transaction monitoring and customer due diligence programs. FinTechs should also have ways to detect and report suspicious activities. This allows the banks to keep up with their regulatory obligations. 

FinTechs aren’t regulated and the sponsor bank is the regulated entity to take care of the risks. By using technological solutions such as DIRO online document verification software, FinTechs can achieve industry-wide KYC and AML compliance.