Michael Hsu, acting Comptroller of the Currency, during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Aug. 3, 2021. The hearing is titled "Oversight of Regulators: Does our Financial System Work for Everyone?" Photographer: Al Drago/Bloomberg via Getty Images
Photo: Al Drago/Bloomberg via Getty Images

Bank-fintech partnerships are under the microscope

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: untangling bank-fintech partnerships, the IRS looks into tax filing and the Brex-Ramp rivalry takes a turn.

Off the chain

No one expected Gary Gensler to recant his views on tough regulation for the crypto sector. But there was a minor mystery in the run-up to the SEC chair’s speech Thursday: Barron’s appeared to have obtained his prepared remarks, according to the Block. But the link to the Barron’s article redirected to the publication’s homepage, while a cached preview of the article remained in Google search. The short version of his actual speech: He's already given the crypto industry all the guidance it needs, and companies need to come in and register with the agency.

— Owen Thomas (email | twitter)

Untangling a web of partnerships

The growing number of partnerships between fintech companies and banks could pose significant risk to the U.S. financial system if not closely scrutinized, a top regulator warned the industry.

Technology companies focused on lending, payments and deposit-taking are powering a "de-integration" of banking services, said Michael Hsu, acting comptroller of the currency. He said banking regulators must take a closer look at the partnerships those fintechs are forming with mostly small, community banks.

"My strong sense is that this process, if left to its own devices, is likely to accelerate and expand until there is a severe problem or even a crisis," said Hsu, whose agency oversees more than 1,000 national banks, federal savings associations and federal branches and associations of foreign banks.

There’s a "nagging familiarity" to the growing complexity of bank-fintech partnerships, Hsu said Wednesday at a conference in New York hosted by the Bank Policy Institute and the Clearing House Association.

  • "As we learned from the 2008 financial crisis, risks that are unseen have a tendency to grow and later to be the source of nasty surprises," Hsu said.
  • Since very few of the growing field of tech companies that provide online checking accounts, lending and payment services have the banking charter required for those activities, banking-as-a-service partnerships between regulated banks and fintechs have flourished.
  • The OCC identified 10 nationally chartered banks under its supervision that have partnerships with more than 50 fintech firms, according to Hsu. There are similar numbers for state-chartered banks supervised by the Federal Reserve and Federal Deposit Insurance Corporation.
  • The majority of those banks have total assets below $10 billion. Interchange fees collected on debit card transactions drive revenue for many fintechs; those smaller banks are exempt from a federal cap on the fees.

The question keeping regulators up at night: Can those small banks monitor their partners? Hsu said the OCC is beginning to categorize different types of partnerships by risk level, increasing regulatory scrutiny when it deems it necessary.

  • It’s more than just talk. The regulator ordered Blue Ridge Bank to improve oversight over its fintech partnerships, as the bank revealed in an SEC filing last week.
  • Blue Ridge, which is based in Virginia and has assets of about $2.8 billion, will be required to get a non-objection letter from the OCC before onboarding any new fintech partners. That's similar to the OCC's policy for banks adding crypto services. The bank also must improve and report back on its other compliance policies for fintech partners, including anti-money laundering and IT procedures, after the OCC said it found "unsafe or unsound practice(s)."
  • Details on the reasoning for the order are otherwise limited, but the Fintech Business Weekly newsletter noted that Blue Ridge’s partnership with MentorWorks, an income-share agreement company, had attracted criticism from consumer groups. Beyond that, a merger with FVCBankcorp was called off earlier this year, months after Blue Ridge revealed that the OCC had identified "certain regulatory concerns with Blue Ridge Bank." Blue Ridge did not respond to a request for comment Wednesday.
  • Unit, a banking-as-a-service provider that partners with Blue Ridge, said it does not expect any impact to its customers because of the order. "We appreciate the significant investments [Blue Ridge] made over the last several months to increase their capacity to serve fintech customers," said Unit CEO Itai Damti in an emailed statement.

Hsu provided a long list of questions the OCC is thinking about during his speech: “How resilient are banking services to stress at fintechs? What happens when fintechs fail? How are bank and fintech business models changing and how are incompatibilities reconciled?” Fintech founders would be wise to pay close attention to how the OCC and other banking regulators seek answers to those questions.

"There is going to be a great winnowing in the partner bank space, and as a fintech you don’t want to be thrown out with the chaff if your partner bank runs into trouble," said Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law and Public Policy. "It may be your customers and your business that suffers most if your partner bank gets into regulatory trouble."

— Ryan Deffenbaugh (email | twitter)


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On the money

Vermont's financial regulator said Celsius resembled a Ponzi scheme at times. The bankrupt crypto lender misled investors about its financial health and sometimes used new investor funds to repay old investors, the Vermont Department of Financial Regulation said in a court filing.

A Senate bill boosting CFTC's crypto oversight will get a hearing. The Senate Committee on Agriculture, Nutrition and Forestry will review on Sept. 14 the Digital Commodities Consumer Protection Act, a proposal to give the Commodity Futures Trading Commission authority over the markets for bitcoin and ether, the two largest cryptocurrencies.

The IRS will consider introducing a free online tax filing system. The Inflation Reduction Act set aside $15 million for the IRS to study how it could create a government-backed free online tax filing system, long a priority of Democrats. TurboTax dropped out of the IRS’ Free File program, a compromise meant to keep the IRS from offering its own tax-filing system, last year, though other providers still participate.

Binance has launched ether staking in the U.S. It is the latest exchange to launch staking ahead of the Ethereum Merge.

GameStop has partnered with FTX. In the tie-up of a meme-stock darling and crypto exchange, GameStop will carry FTX gift cards and the two companies will work together on marketing initiatives. The news of the partnership boosted GameStop’s share price, despite the company reporting a 4% decrease in second-quarter net sales.


Michael Barr, the Federal Reserve’s vice chair for supervision, isn’t giving crypto a break on oversight. “I plan to make sure that the crypto activity of banks that we supervise is subject to the necessary safeguards that protect the safety of the banking system as well as bank customers,” he said in a speech at the Brookings Institution Wednesday.

Did you know crypto VC Katie Haun started out as a constitutional lawyer? The Haun Ventures chief took a look into the Tornado Cash situation and isn’t convinced a First Amendment defense of code as speech will work. Maybe try the Fourth Amendment instead? “If you’re building privacy preserving tech in crypto, it’s worth familiarizing yourself with other relevant aspects of the law aside from hanging your hat on one amendment related to speech,” she wrote in a blog post.

Moves and hires

Shopify shook up its top ranks. CEO Tobi Lütke announced he was promoting Kaz Nejatian to chief operating officer. Nejatian, a member of Protocol’s Braintrust, has spearheaded the company’s push into financial services. Current COO Toby Shannan is joining the board and will serve as an adviser. Jeff Hoffmeister will be the ecommerce software provider’s CFO after Amy Shapero steps down in October.

Sam Blond is joining Founders Fund as a partner. Blond is currently chief revenue officer at Brex. Founders Fund, by the way, is an investor in Brex rival Ramp. Blond told TechCrunch the connection to Ramp was coincidental and "wasn’t influential in my motivation to want to join, and my focus will be on investing in and helping new portfolio companies."

Dave has named Chien-Liang Chou as chief technology officer. Chou previously served as executive vice president of engineering for the neobank.

U.K. Prime Minister Liz Truss named Kwasi Kwarteng as the country's next finance minister. Kwarteng is currently the secretary of state for business, energy and industrial strategy. It is not clear yet if he shares his predecessor's ambition to make the U.K. a crypto hub, though his former department advocated for blockchain technology.

Saudi Arabia's banking regulator has named Mohsen AlZahrani to lead its crypto efforts. Saudi Arabia has previously taken a cautious approach toward crypto, Bloomberg reported, but its hiring of the former Accenture managing director shows its ambitions in the industry.

Jill Sommers has joined the board of FTX.US Derivatives. Sommers served as a commissioner of the Commodity Futures Trading Commission from 2007 to 2013.


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