Consumer Advocates Call on Banking Regulators to Rein in Reckless and Harmful Bank-Fintech Partnerships

Washington, DC - Americans for Financial Reform Education Fund (AFREF) and the Consumer Federation of America (CFA) submitted comments this week calling on regulators to more closely supervise partnerships between banks and independent banking-as-a-service (BaaS) companies that pose unique and serious risks for consumers.

Among these many risks, consumers advocates highlighted the harm and losses that occur when consumers use fintech products, thinking that they are as safe as more traditional financial products. Regulators must gain the power to supervise the activities of BaaS firms that partner with banks. said Adam Rust, Director of Financial Services for the Consumer Federation of America. "There are some things banks must do, beginning with keeping track of deposits, and there are some things they cannot do, such as skimming profits from money laundering and fraud. Unfortunately, this wasn't clear to some banks that have fintech partnerships. It is time for regulators to close the independent BaaS loophole," said Rust.

The comment called on federal regulatory agencies to use their authority under the Banking Services Company Act to assert supervisory authority over companies when they conduct banking services and to hold banks accountable for identifying deposit liabilities owed to each depositor, even when deposits are brokered to other financial institutions.

The problems posed by so-called BaaS firms came to light earlier this year when the collapse of the fintech company Synapse revealed major gaps in regulatory compliance by both Synapse and its banking partners, including gaps in critical anti-money laundering measures meant to curtail fraud and other financial crimes Additionally, Synapse's choice to shift deposits into accounts held in Synapse's name and not in the names of the consumers who placed the deposits made it harder to determine how much Synapse's customers held and were owed when Synapse went bankrupt.

"Banks cannot outsource essential bank activities like ledgering and fraud prevention," said Adam Rust. "A charter is a privilege, not a chance to skim profits from money laundering and fraud. A system of trust hasn't worked - it's time to insist that regulators can verify that consumers are protected."

Consumers were harmed by Synapse's use of these "for benefit of" accounts. This practice led to hundreds of thousands of customers losing access to the money in their accounts while Synapse and its bank partners fought in court over who was responsible for keeping track of their customers' money. Advocates noted these types of lapses in financial management stand to disproportionately harm vulnerable populations that use fintech products.

"Black, Latine and other people of color who have historically faced barriers to financial services due to racist policies and practices can't afford to also lose out when fintech firms and their partners, who promote their products as pathways to financial inclusion, instead engage in risky practices and fail financial management 101," said Christine Chen Zinner, Senior Policy Counsel with Americans for Financial Reform Education Fund. "Regulators must not allow bank fintech arrangements to amplify existing inequalities in our financial system and must exercise greater supervisory authority over these partnerships that can harm their customers."

Advocates also noted that bank-fintech partnerships that incorporate crypto products or services add still another layer of complexity and risk with the potential to harm consumers. For example, Juno Finance, a key fintech client of Synapse, offers customers tools to more easily access crypto trading and transfer funds from customers' bank deposit accounts to crypto platforms. However, Juno's easy conversion of dollars into cryptocurrency was a magnet for scammers and "nightmare fuel" for Synapse and Evolve's compliance teams that traditional bank supervision could have curbed.

AFREF and CFA's comments underscored how gaps in regulatory compliance by banks and fintech partners, such as those found in the Synapse case, can become even more problematic when their clients are offered products and services associated with high-risk activities, like crypto.

"Juno's crypto-centric business model raised clear red flags for illicit financial activity, and it appears their fintech partners knew it. But they failed to resolve the problems, and the lack of adequate supervision by regulators may mean these problems went on far longer than they should have," said Mark Hays, Associate Director, Crypto and Fintech with Americans for Financial Reform Education Fund.

"Regulators should consider bank-fintech arrangements that include a crypto component as higher risk and act accordingly to provide proactive supervision and oversight to protect consumers and hold the firms involved in these arrangements accountable for their regulatory obligations."