In a bid to protect consumers, the AFREF and the CFA have issued a call for stringent supervision over partnerships between banks and FinTech companies.
This appeal follows alarming revelations about the hazards consumers face when using banking-as-a-service (BaaS) products, which they often mistakenly believe are as secure as traditional banking services.
Adam Rust, Director of Financial Services for the Consumer Federation of America, emphasized the urgent need for regulatory action. “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,” Rust stated.
The call to action comes in the wake of the collapse of Synapse, a FinTech firm, which exposed significant regulatory compliance failures, including lapses in essential anti-money laundering protocols. The mismanagement extended to the misplacement of consumer deposits under Synapse’s name rather than the rightful depositors, complicating the recovery process during bankruptcy proceedings.
“Banks cannot outsource essential bank activities like ledgering and fraud prevention,” Rust added. “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.”
The detrimental impact of these oversight failures is notably severe among vulnerable groups. Christine Chen Zinner, Senior Policy Counsel with Americans for Financial Reform Education Fund, highlighted how these failures exacerbate financial disparities. “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,” Zinner explained.
Further complicating the landscape are FinTech-bank collaborations involving cryptocurrencies, such as those offered by Juno Finance, a client of Synapse. These products introduce additional layers of risk and complexity, often becoming gateways for fraud and regulatory nightmares.
Mark Hays, Associate Director, Crypto and FinTech with Americans for Financial Reform Education Fund, warned of the heightened risks associated with crypto-centric business models. “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,” Hays remarked.
In conclusion, AFREF and CFA’s statements underscore the critical need for enhanced regulatory oversight to safeguard consumers from the inherent risks of modern financial partnerships.
Copyright © 2024 RegTech Analyst
Copyright © 2018 RegTech Analyst
