The bank and fintech Green Dot says it has received a proposed consent order from the Federal Reserve tied to its compliance with anti-money-laundering regulations and other risk management matters that could cost it tens of millions of dollars.
Green Dot has set aside $20 million related to the proposed order, Chief Financial Officer Jess Unruh said on its quarterly earnings call Tuesday. The enforcement action, which includes civil money penalties, could end up costing as much as $50 million, according to an 8-K report the company filed the same day.
The company continues to invest in its anti-money-laundering program "to remediate the matters addressed in the proposed consent order, ensure we have market-leading compliance programs and to mitigate and reduce our fraud losses over the long term," Unruh said. "Over time, we believe that this will be a competitive advantage."
The Fed's move is the latest example of regulators' crackdown on sponsor banks, observers said. Several banking-as-a-service banks have received consent orders in recent months due to the compliance failings of their fintech partners, including
The Green Dot-related order, which has not been finalized, involves activities and practices that date back to 2017, according to Green Dot CEO George W. Gresham, who became chief executive in 2020.
"We take regulatory compliance very seriously, and we have invested considerably in people, in time and process improvement and product improvement and in money to improve our capabilities in this regard," Gresham said on the earnings call. "We have changed our culture throughout the organization to ensure policies, programs, services and people make regulatory compliance our top priority, our North Star."
Green Dot is an Austin, Texas, fintech and $4.8 billion-asset bank holding company that issues prepaid and debit cards and provides savings accounts, with a focus on serving the underbanked. It provides banking as a service to partners that include Apple, Walmart, Amazon and TurboTax.
The Fed's action may be a rebuke of Green Dot's partners.
"It's like lending your car to a friend: If the friend gets in an accident, it's your car and your insurance that is impacted," said Jim Richards, founder and principal of RegTech Consulting LLC.
Banking-as-a-service banks typically are small because of the Durbin amendment, which limits the debit interchange fees charged by banks with more than $10 billion of assets. These smaller banks tend to be ill-equipped to handle the sudden increases in deposits, customers and transactions that their fintech clients bring, observers say, as well as to monitor the compliance of those partners.
"Everybody's running into the same thing," said Dave Mayo, founder of the Bankers Helping Bankers Association. "As they went through the process of creating a sponsor bank, they had a lot more faith in the fintech community than they probably should have."
The fintechs are not regulated, "so they can do anything they want," Mayo said. "The banker, on the other hand, is responsible. We all know that now."
Some fintechs are not following anti-money-laundering regulations at all, Mayo said. Others use a cobbled-together application programming interface that doesn't work well.
The work of vetting new customers for AML purposes has gotten tougher with increased adoption of online account opening, Mayo pointed out.
"During COVID, when everybody quit going into the bank, everyone, bankers included, moved to a digital-onboarding model," he said.
A branch employee can look at a potential customers' driver's license beside their face and verify their identity. This is much harder to do online, and this allows fraudsters and money launderers to come in through the back door, Mayo said.
And certain aspects of anti-money-laundering work, like Office of Foreign Assets Control checks and sanctions screening, are poorly understood by many people, Mayo said. Some core systems and AML software programs have needed controls built in. But compliant account opening and monitoring is nuanced and requires noticing little things like when new customers have copied and pasted their name into a field – a big red flag.
Some industry participants object to the flurry of recent consent orders related to banking as a service.
"Regulation by enforcement is not a prudent strategy to encourage the innovation that will increase access to financial services," Phil Goldfeder, CEO of the American Fintech Council, said in an emailed statement. "Innovative banks require a clear and consistent regulatory framework that reflects responsible industry developments and clarifies supervisory expectations for innovative financial services business models."
But Mayo described them in a positive light.
"I look at this as a super-positive evolution," Mayo said. "I think if nobody cared, they'd turn it off. In fact, they're not trying to say don't do [banking-as-a-service] banking. They're saying, try to do it in a better way."
