In an effort to shield consumers, the Americans for Financial Reform Education Fund (AFREF) and the Consumer Federation of America (CFA) have urged regulators to intensify scrutiny of bank-FinTech partnerships. These calls stem from recent evidence showing that consumers often assume banking-as-a-service (BaaS) products are as safe as conventional banking, leaving them vulnerable to financial risks.
Adam Rust, CFA’s Director of Financial Services, stressed the urgency of regulatory intervention. “Banks need to fulfill certain obligations, such as tracking deposits, and avoid profit skimming from fraud and money laundering activities. However, some banks in FinTech partnerships don’t adhere to these standards. Regulators must address this by closing the independent BaaS loophole,” Rust said.
This demand for action follows the collapse of Synapse, a major FinTech company, which revealed considerable regulatory compliance issues. Synapse reportedly fell short in meeting essential anti-money laundering requirements, with mishandled consumer deposits in its accounts rather than those of individual clients. This failure complicated consumer deposit recovery during the firm’s bankruptcy proceedings.
“Banks should not outsource core tasks like fraud prevention and account management,” Rust continued. “A charter is a privilege, not a license to profit from illegal activities. Regulators need to ensure consumer protection by verifying compliance rather than relying on trust alone.”
The fallout from these regulatory lapses disproportionately impacts vulnerable communities. Christine Chen Zinner, Senior Policy Counsel at AFREF, noted that underserved communities, particularly Black, Latine, and other minority groups, face amplified risks. “These groups, historically marginalized from traditional financial services due to discriminatory policies, cannot afford additional setbacks caused by risky and mismanaged FinTech partnerships promoted as tools for financial inclusion,” Zinner stated.
FinTech-bank partnerships involving cryptocurrencies add another layer of risk, exemplified by Juno Finance, a Synapse client. These crypto-based products heighten exposure to fraud and regulatory challenges.
Mark Hays, Associate Director of Crypto and FinTech at AFREF, warned of the dangers of crypto-heavy business models. “Juno’s crypto-focused approach posed red flags for potential illicit activity, yet their FinTech partners failed to address these risks. Weak regulatory supervision likely allowed these issues to persist longer than they should have,” Hays said.
In summary, the appeals from AFREF and CFA underscore the urgent need for regulatory reform to protect consumers from the rising risks in modern financial collaborations.
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