Fed Enforcements Now Focus on Instant Payments and Tokens

A recent enforcement action by the Federal Reserve taken against Customers Bancorp and its Customers Bank subsidiary has taken note of the risks and challenges inherent in handling digital assets — and faster payments, too.

In the action, announced on Thursday (Aug. 8) and signed by the parties this week, the central bank ordered that the bank must submit plans to retool and improve its risk management practices, with an eye on anti-money laundering (AML) and digital asset concentration — along with addressing compliance deficiencies tied to its instant payment operations.

A Digital Strategy

In terms of the bank’s business model, Customers Bancorp has pursued a business strategy “that involves offering banking services to digital asset customers … and also operates an instant payments platform that allows commercial clients to make tokenized payments over a distributed ledger technology system to other commercial clients of the Bank.”

The written agreement says Customers must institute a “system of internal controls reasonably designed to ensure ongoing compliance with the BSA/AML Requirements including, but not limited to, customer due diligence, beneficial ownership, and suspicious activity monitoring and reporting,” and said later in the filing that such actions must also include the “documentation necessary to verify the identity, source of wealth, and business activities of the customer; and documentation necessary to understand the normal and expected transactions of the customer.”

The bank will also have to give the central bank prior written notice surrounding any plans that would involve the “creation, testing, or launching of a new intra- or inter-bank instant payments platform or network other than the existing Customers Bank Instant Token network.”

The Read Across to Other Banks

Customers is a state-chartered bank in Pennsylvania and operates as a member of the Federal Reserve system, we note — and though the digital aspect (read: crypto) of these operations may be in focus, there’s a read across for banks in general … particularly as they connect to, and use, various faster payment options and as they use tokens and other payment vehicles to speed up transactions, or enable them to be done 24/7/365.

The far-flung nature of those platforms, of the customer bases and the speedy onboarding of those customers, demands that banks rethink, and in some ways reinvent, their customer-facing (for onboarding) and back-office (risk management) operations.

And as PYMNTS Intelligence has found, earlier this year there are already challenges in place. Nearly half of financial institution executives are concerned that shift to, well, faster everything. In the PYMNTS Intelligence study “How Fraud Fears Impact FIs’ Adoption of Faster Payment Solutions.” For financial institutions (FIs) that are already experiencing higher levels of fraud, the percentage of open banking/faster payments skeptics stands at 57% as they say that risks outweigh rewards. Payment speed has already been identified as a key concern.