Reaction of Thread Bank to FDIC Enforcement Measure

Reaction of Thread Bank to FDIC Enforcement Measure

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At least, that was the idea behind BaaS: a shared compliance model that lets FinTechs concentrate on growth and innovation while still operating legally. But the way things have played out to-date hasn’t gone quite according to plan.

The FDIC, the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) released their final guidance on risk management related to third-party relationships just one year ago on June 6, 2023.

Since then, the fallout from Synapse’s chaotic bankruptcy has sorely tested the interconnectedness of the BaaS and FinTech landscape. Adding insult to injury, Synapse’s own primary banking partner, Evolve, last week (June 26) suffered a serious cyberattack, putting its risk controls under the spotlight.

“The regulators are now awake,” Thredd CEO Jim McCarthy told PYMNTS. “Too many people are focused on the ‘as a service’ part — but have ‘minored’ in the banking part, if at all … If you are going to participate in that arena, I would contend that the service component is irrelevant if you are unsuccessful in the banking.

Continue reading: Synapse's Failure Teaches Its B2B Partners Hard Lessons

When Middleware Loses its Middle 

PYMNTS Intelligence found this past summer that 65% of banks and credit unions have entered into at least one FinTech partnership in the past three years, with 76% of banks viewing FinTech partnerships as necessary to meeting customer expectations. And a full 95% of banks are focused on using partnerships to enhance their own digital product offerings.

And Thread Bancorp, which was previously known as Civis, already had a history of regulatory actions. The company’s recent FinTech partnerships have enabled it to grow rapidly, from less than $100 million to over $720 million in from the end of 2020 to Q1’24, based on FDIC call reports.

“With complex ecosystems, you have a higher number of partners than you may have historically had” in the past,  Larson McNeil, co-head of marketplaces and digital ecosystems at J.P. Morgan Payments, told PYMNTS. This creates new considerations for the corporate treasury function, including management of those partners and counterparty risk.

The Thread Bank case may serve as an indicator of how regulators are approaching the intersection of traditional banking and financial technology. Strong, open, and mutually beneficial relationships between banks and FinTech companies are essential to leveraging the BaaS model as the financial landscape changes. By doing this, they can work together to influence banking's future to be more innovative, efficient, and inclusive. 

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