More community banks are likely to get slapped on the wrist in the near future as banking regulators crack down on partnerships with financial technology companies.
Blue Ridge Bank NA, the bank subsidiary of Blue Ridge Bankshares Inc., recently entered into a formal written agreement with the Office of the Comptroller of the Currency regarding its fintech partnerships and risk compliance related to those partnerships. As banks increasingly work with fintech companies, regulators are probing those partnerships, and similar agreements to the one Blue Ridge Bank struck with the OCC are likely to come about in the future, experts said.
"Banks over the years have become comfortable with their own [Bank Secrecy Act] and compliance risk management. It's when they engage with third parties to do work on their behalf and those third parties may not have the same compliance regime in their DNA that banks have," said John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP. "The more that banks continue to evolve in their relationships with fintechs, we're going to see much more of this."
Regulators issue guidance through individual discipline
Experts said the Blue Ridge Bank agreement is likely signaling broader industry guidance around fintech partnerships and how to ensure there are proper risk management controls in place for those partnerships.
"Regulators look for examples so they can sort of administer policy to the masses, and they have to pick one or two companies to use as examples. It's unfortunate that Blue Ridge is caught in the crosshairs of that," Chris Marinac, an analyst with Janney Montgomery Scott, said in an interview. "Regulators kind of pick and choose where they can make examples."
In order to avoid such regulatory scrutiny, banks with fintech partnerships should pay close attention to this agreement, Geiringer said.
"I always recommend that all of our clients read the enforcement actions by the regulators because you see what their priorities are," he said in an interview. "Banks would be wise to review this enforcement action and others like it to determine whether there are any gaps in their own compliance function, either vis-à-vis fintechs or organically."
The agreement may also signal that there is a new sheriff in town as Biden-appointed regulators have ramped up financial services regulation, experts said.
"Today's regulatory environment is just tougher than previous years," Marinac said. "We can choose door number one to accept it and work within the new goalposts, or pick door number two by complaining and fighting the regulators which gets us absolutely nowhere. Most banks and boards are likely to choose door number one and work within the new rules, implicit and explicit alike."
As such, Blue Ridge will not be the only bank to get hit with a regulatory agreement regarding fintech partnerships, both Marinac and Geiringer predicted.
OCC cracking down
The OCC is zeroing in on the risks involved with bank and fintech partnerships, particularly regarding risk management expectations, Acting Comptroller Michael Hsu said while speaking at an industry conference hosted by the Bank Policy Institute and the Clearing House Association on Sept. 7.
"Fortunately, this risk can be mitigated," Hsu said. "At the OCC, we are currently working on a process to subdivide bank-fintech arrangements into cohorts with similar safety and soundness risk profiles and attributes. This will enable a clearer focus on risks and risk management expectations."
Hsu said the risks are higher for community banks as the "vast majority" of banks with current banking-as-a-service, or BaaS, fintech partnerships have less than $10 billion in assets. Further, the regulator recently identified at least 10 OCC-regulated banks that have BaaS partnerships with nearly 50 fintechs.
"Banks and tech firms, in an effort to provide a 'seamless' customer experience, are teaming up in ways that make it more difficult for customers, regulators, and the industry to distinguish between where the bank stops and where the tech firm starts," Hsu said. "My strong sense is that this process, if left to its own devices, is likely to accelerate and expand until there is a severe problem or even a crisis."
Blue Ridge Bank's partnerships
While the terms of Blue Ridge Bank's agreement with the OCC center largely around fintech partnerships and the risk controls around such partnerships, it is unknown what exactly triggered the regulator's interest.
"My perception is that regulators get somewhat concerned if they don't feel that there are enough plans documented. They get concerned if there is not enough communication," Marinac said. "I don't know if we'll ever know for sure, and companies typically don't disclose this."
Blue Ridge Bank declined to comment for this story.
In January, Blue Ridge Bankshares terminated its planned merger of equals with FVCBankcorp Inc. after disclosing in November 2021 that the OCC identified certain regulatory concerns with Blue Ridge Bank. Experts told S&P Global Market Intelligence in February that the OCC was likely probing Blue Ridge Bank's rapid growth and fintech partnerships.
In an April 2021 letter to the OCC, a coalition of nonprofits expressed concerns about the bank's partnership with MentorWorks, a company that provides students with income share agreements, or ISAs. An ISA is an alternative to traditional student loans where a student receives education funding in exchange for a portion of their income after graduation.
One of those signatories, the Student Borrower Protection Center, told S&P Global Market Intelligence in February that it met with the OCC in October 2021 to discuss ISAs.
According to a 10-K filed on March 11, Blue Ridge Bank had 10 active fintech partnerships. One such partnership was with Aeldra Financial Inc., a neobank targeting customers outside of the U.S. According to Aeldra's website, it is "winding down its operations" and terminating accounts associated with its partnership with Blue Ridge Bank.