Will Evolve’s ‘Cease and Desist’ Order Chill Bank and FinTech Partnerships?

The Federal Reserve Board issued a “cease and desist” order against Evolve Bancorp and its subsidiary, Evolve Bank & Trust, that may have a chilling effect on bank-FinTech partnerships.

In addition to a series of corrective measures — focused on shoring up what have been termed “deficiencies” in risk management and compliance — there’s particular focus on Evolve’s Open Banking Division (OBD), and the Fed’s Friday (June 14) release of the cease-and-desist order remains independent of the ongoing Synapse bankruptcy proceedings.

Ban on New Partnerships

In the read across for the evolving FinTech ecosystem, the order notes that “Effective immediately, the Bank shall not without the prior written approval of the Supervisors: (i) establish any new fintech partners, subsidiaries, business lines, products, programs, services, or program managers related to OBD, or (ii) offer new products, programs, or services to an existing fintech partner, program manager, or subsidiary of OBD.

“All requests for prior approval shall be submitted in writing, and shall contain, at a minimum, any proposed contract, any management, board, or board committee minutes approving the activity or relationship, a description of the applicable measures to effectively manage the risk posed by the activity or relationship. Before exiting a relationship with a fintech partner, the Bank shall conduct and provide the Supervisors with an impact analysis on the Bank’s liquidity.”

Evolve, as noted on its website, partners with a wide array of FinTechs including Affirm, Bond, Stripe and others.

And it may be the case that a ban on new partnerships does two things: Limits growth — at least of Evolve itself, and slows down at least some of the innovations that have been part of the promise of open banking … as regulators want to take a closer look at everything that’s in the works, every contract, and must offer up its stamp of approval and a sign-off.

All of which dovetails with remarks made to Karen Webster this past week from Amias Gerety, partner at QED Investors. During an interview on the Synapse bankruptcy, Gerety observed that among the paths forward for Evolve that “I think another bank will buy Evolve — or Evolve will be out of FinTech partnerships entirely.”

Evolve is not alone here, as other BaaS firms and FinTechs have been served with orders that seek more stringent oversight of various policies, partnerships and risk management. We reported earlier this year that the Federal Deposit Insurance Corp. entered consent orders against two banks, Sutton Bank and Piermont Bank, last month. The orders spotlight issues with third-party relationships and banking-as-a-service activities.

And as spotlighted here, a number of firms have been issued “cease and desist” letters from the FDIC for violations of sections of the Federal Deposit Insurance Act, a roster that includes Prizepool, AmeriStar and virtual wallet firm Organo Payments.

A Broad Range of Offerings

Evolve’s OBD offerings include deposit accounts and payment processing services to financial technology companies. The FinTechs, of course, offer products and services tied to those accounts and services to end users.

The order notes that examinations by the Federal Reserve Bank of St. Louis and the Arkansas State Bank Department (ASBD) found risk management deficiencies within the OBD back in August of 2023 — and subsequent reviews in January of this year revealed further non-compliance with anti-money laundering (AML) and Bank Secrecy Act (BSA) regulations, as well as Office of Foreign Assets Control (OFAC) requirements.

Dated June 11, the order sets a 90-day window for Evolve’s board of directors to submit a plan to “strengthen oversight” of the bank’s management and operations, particularly focusing on compliance with BSA/AML and OFAC regulations. Risk management practices must be enhanced, according to the order, including the agreement that Evolve will use an independent third party to conduct a thorough review of the OBD’s consumer compliance practices and implement necessary improvements.

With a nod to actual financial products, within 60 days of the order, Evolve must “enhance “its lending and credit risk management policies, ensuring comprehensive analyses of borrowers’ repayment capabilities and collateral value. An independent third party must validate the effectiveness of the bank’s transaction monitoring system.

Additionally, the order imposes financial and operational constraints on Evolve Bancorp itself. The bank must submit a detailed cash flow projection for 2024 and subsequent years and obtain regulatory approval before declaring dividends, engaging in share repurchases, or incurring new debt.

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