Fed Scrutiny of Regional Banks Highlights Importance of KYB, FinTech Partnerships

The increased scrutiny of regional banks — and a boost in capital requirements — may drive them towards FinTech partnerships to shore up compliance and know-your-business efforts.

That might also light a fire under some dealmaking in the process.

To that end, and as reported by Bloomberg this week, the Federal Reserve has issued “private warnings” to several super-regional banks (typically defined as those with assets north of $100 billion to as much as $250 billion).

The gist of the message, in addition to mentioning liquidity and capital, is that they must address issues tied to compliance and technology. Among the banks reported to have received these communications: Citizens Financial, Fifth Third Bancorp and M&T Bank Corp.

The Fed actions come in the same week that the FDIC’s board of directors met to discuss a Notice of Proposed Rulemaking (NPR) jointly with the board of governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC). Under that proposal, depository institutions with more than $100 billion in assets would have to maintain a minimum amount of long-term debt.

More Partnerships in the Offing?

The shift in balance sheet composition, we note, might conceivably limit the capital available to fund technology projects, at least a bit (as the debt outstanding demands debt servicing). The technology and compliance referenced above mean, too, that the banks will have to re-examine the ways they leverage data and systems to do business — and remain in compliance, which in turn means knowing who they’re onboarding and doing business with.

The government “warnings” give way to corrective action, which may lead to banks enlisting the aid of alternative data sources and providers — FinTechs among them — to tackle the issues. In doing so, the ultimate beneficial effect may be that the back-end processes are quickened enough so that account openings — and transactions — are more seamless than before.

In the meantime, the mandates are gathering steam. In an interview with PYMNTS, Charles Zhu, vice president of product at Enigma, observed that the Financial Crimes Enforcement Network (FinCEN) is working on new rules that will include details on the data that must be collected regarding ultimate beneficial owners — or anyone with more than a 25% stake in a business.

“This is a really rapid pace of regulation,” Zhu said. The amount of money already being spent on compliance is considerable, as Zhu estimated that many banks are spending as much as 5% of revenues to grapple with compliance matters. Traditionally, he said, many FIs have tried to conduct all of their KYB and KYC activities in-house. But a partnership approach can offload some of the heavy lifting involved.

In just a few examples of the digitization efforts in the onboarding space, Virtusa and Thought Machine said earlier this year that they’ve launch a platform that helps financial institutions onboard small- to medium-sized businesses (SMBs).

And in the report, “Account Opening And Loan Servicing In The Digital Environment,” a collaboration between PYMNTS and Finicity, a Mastercard company, 42% of consumers said they want financial institutions to offer automatic data transfers upon opening new accounts.

In a separate interview with PYMNTS’ Karen Webster, Charlie Youakim, CEO of Sezzle, said that dealmaking might ramp up within financial services, as banks find a natural fit for (some) FinTechs within their own operations, wholly-owned.

“The FinTechs are becoming more ‘in tune’ with what needs to be done on the regulatory and compliance front,” said Youakim. “They have been brought into the fold, and have been ‘professionalized’ — and now may be ready to be brought into a bank.”