Failure of risk management in partnership with fintech leads to enforcement action

Failure to maintain effective risk management in partnerships with financial technology (fintech) companies has led to an enforcement action against an Arkansas banking firm and bank, the Federal Reserve said Friday.

In a release, the Fed said it took the action against Evolve Bancorp, Inc., and Evolve Bank & Trust, both of West Memphis, Ark., for deficiencies in the bank’s anti-money laundering, risk management, and consumer compliance programs.

Under the action, the banking firm is required to improve its policies and programs in those areas, in addition to making other remedial improvements.

However, the Fed is also requiring the firm, for current partnerships with financial technology companies, to strengthen its risk management practices to address potential risks, including compliance and fraud risks, “by implementing appropriate oversight and monitoring of those relationships, including through enhanced procedures related to recordkeeping and consumer compliance programs.”

The agency said its action against Evolve is independent of the bankruptcy proceedings regarding Synapse Financial Technologies, Inc.

The agency said the Evolve works with various fintech firms that provide access to banking products and services to their end customers. Specifically, the Fed said, the firm “pursued a business strategy that primarily involves offering deposit accounts and payment processing services to financial technology companies (‘fintech partners’) that, in turn, offer various financial products and services to end-user customers, either directly or through a partnership with other entities.”

The Fed said exams conducted in 2023 found that Evolve engaged in unsafe and unsound banking practices by failing to have in place an effective risk management framework for those partnerships. “In addition, Evolve did not maintain an effective risk management program or controls sufficient to comply with anti-money laundering laws and laws protecting consumers,” the Fed said.

Federal Reserve Board issues an enforcement action against Evolve Bancorp, Inc. and Evolve Bank & Trust for deficiencies in the bank’s anti-money laundering, risk management, and consumer compliance programs