British regulators are threatening to directly shut down payment companies that don't have adequate risk controls, a move that suggests the banking crisis is increasing the legal jeopardy for any firm connected to financial services.
The
The FCA did not mention Silicon Valley Bank, Credit Suisse or other troubled banks, but it was more than implied. Payment firms within and outside the U.K. — and their bank partners — are expected to do more to shore up liquidity risks and credit risks at a time when they are facing myriad other challenges.
Pressure in the U.K. also does not necessarily mean a payments crackdown is coming in the U.S., but it's likely the
"This will usher in another wave of de-risking," said Carol Van Cleef, a lawyer and CEO of Luminous Group, a Washington, D.C.-based blockchain firm.
De-risking generally refers to firms resetting terms or making moves to reduce counterparty risk.
"The events of the past two weeks will lead into a period where regulators will take a closer look at what banks have been doing in terms of due diligence, to see if there has been a breakdown," Van Cleef said.
"Payment firms that have money transmitter licenses and industrial bank licenses are already heavily regulated and may face less pressure to update compliance and risk," Van Cleef said. "That includes most of the large well-known U.S.-based payment companies."
But newer payment companies that rely on bank partnerships to manage regulatory compliance for digital payments or other financial services could find those partnerships under scrutiny if regulators turn up the heat on banks.
"As a veteran of numerous de-riskings over the years, there can be a great deal of 'creativity' on the part of those firms that are looking for banks," Van Cleef said, adding that regulators will likely examine how banks are vetting fintech startups. "That will mean more work for the banks and that will mean more work for the payment companies."
The FCA did not return a request for comment, but its warning suggests it sees a systemic lack of risk management for payment companies, at least in the U.K. The regulator's letter said common failings among payment firms include safeguarding consumers' money if the payment company becomes insolvent, inadequate reconciliation and a lack of a procedure to identify which funds must be safeguarded to protect customers.
"Both the FTC and the
As the Silicon Valley Bank crisis unfolded, the potential for payments to get delayed or frozen in the event of a sudden bank failure became apparent. There were
"The backbone of the payments infrastructure in the U.S. is the banking industry," said Greg Cohen, CEO of Fortis. For credit card processors or ACH processing in the U.S., there is a financial institution in the mix often referred to as a "sponsor," Cohen explained. If a sponsor is impacted in any way, there is potential exposure to the payment processors that leverage that sponsor.
Historically, the impacts of bank failures have been limited to a day or two of delayed funding, prior to a third party like the FDIC or new bank stepping in. "But there could be other effects including changes in underwriting and risk management processes which could impact approval and funding practices of a processor," Cohen said.
The biggest issue when businesses move large sums of money around quickly is the complexity of managing a business from multiple accounts, said Cohen.
"Keeping all that straight isn't simple, especially for smaller businesses, and could lead to increases in human error which can create terrible experiences for customers, upset other business operations and potentially lose the company money," Cohen said.
Many businesses will diversify their bank accounts to accommodate bank stability risk, according to Tipalti CEO Chen Amit, adding his own firm maintains several bank accounts and can shift funds from one to another.
"We're not out of the woods in terms of the bank crisis," Amit said. "There's a psychological element to this and you want to ensure you're with a bank that has a strong balance sheet."
Beyond compliance risk, payment firms also face heightened security risk resulting from a spike in large transactions between clients.
Payment fraud becomes a greater danger in times of economic stress, given the large amount of funds that may be transferred if a supplier, or a supplier's bank, is under duress, according to Amit.
"These firms may be changing payments from account 'xyz' to a new bank account," Amit said, adding that if this transfer happens with a high sense of urgency, it increases the chance that the firm isn't a client's vendor but a fraudster.
"This is a risk on a good day," Amit said. "In this environment many can fall into this trap."
