Have CFSB's Sprawling Fintech Partnerships Caught Up With The Tiny New York Bank?
Have CFSB's Sprawling Fintech Partnerships Caught Up With The Tiny New York Bank?
Nine Congressional Reps Demand Regulators Respond To Synapse Collapse As Bankruptcy Drags On
Hey all, Jason here.
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Storm clouds started gathering for partner banks as early as 2022, with Blue Ridge receiving its first of two enforcement actions from the OCC that fall.
Since then, regulatory scrutiny has only intensified, with numerous other partner banks receiving public enforcement actions from their regulators and as fallout from the ongoing Synapse bankruptcy continues to metastasize.
In addition to the wave of consent orders, the three prudential bank regulators, the OCC, Fed, and FDIC, have released a steady stream of guidance, public remarks, and new initiatives that make clear bank-fintech partnerships and banking-as-a-service are not only on their radar, but are seemingly one of their top regulatory priorities.
Despite these growing warnings signs, Community Federal Savings Bank, known as CFSB, has continued to lean in to banking-as-a-service, even taking on programs, including higher-risk ones, that needed to seek new bank partners when their previous ones were hit with enforcement actions.
CFSB’s sprawling collection of partners, both direct and through intermediary platform providers, have helped the one-branch bank in Woodhaven, New York, to grow quickly: from about $160 million, at the end of 2018, to nearly $860 million at the end of Q1 2024 — a 438% jump. CFSB’s growing assets helped lift the bank from a $2.5 million loss in 2017 to a $14.5 million profit in 2023.
The rapid growth in assets isn’t the only red flag that may have caught regulators’ attention.
Per prior reporting from The Information’s Michael Roddan, family-owned CFSB had been operating under first a cease and desist and then a formal agreement with the OCC from 2011 until 2022.
The agreements required the bank to develop a business and profit plan, ensure that the bank had “competent management in place,” including its BSA Officer, revise and adhere to a Suspicious Activity Report (SAR) program that meets legal and regulatory requirements, and develop and implement policies to comply with OFAC requirements.
The formal agreement CFSB entered into in 2020, which was terminated two years later, also required the bank to formulate and receive regulatory non-objection to a strategic plan and prohibited the bank from deviating substantially from that plan without supervisory non-objection.
The regulatory actions aren’t the only legal issues CFSB has faced in the past.
The Information’s Roddan also flagged a 2021 lawsuit from a hand sanitizer distributor, which alleged that the owners of CFSB, the Ghermezian family, were selling knock-off products and using accounts at the bank to move money tied to the scheme (emphasis added):
“[T]he judge overseeing the case repeated allegations that a Ghermezian-controlled shell company used a CFSB account to make transactions, and that Syd Ghermezian directed the bank to not report the transactions to regulators.”
The case against CFSB and its chairman and CEO, Syd Ghermezian, was ultimately dismissed, though the case against his brother, Don Ghermezian, continues.
CFSB’s president, Martin Hyman, told The Information, “Whatever the current status of the case, it has nothing to do with CFSB.”
CFSB Continued Growing BaaS Business As Other Banks De-Risked
Despite its past regulatory and legal issues, CFSB has grown to become one of the more prolific sponsor banks — including for higher-risk categories like cross-border payments, business banking for firms outside the US, and crypto.
A review of sites’ terms and conditions indicates CFSB has worked with or currently partners with nearly 40 programs, including through multiple intermediary platform providers, like Nium, Visa-owned Currencycloud, Alviere, Highnote, and GoCardless.
Some of CFSB’s programs are fairly vanilla and relatively low-risk, like kids’ bank account startups GoHenry and Greenlight and credit-builder offerings from Experian and Credit Sesame.
But many of the programs CFSB has supported or currently works with are higher-risk, including numerous startups that facilitate cross-border payments for consumers and businesses:
Airwallex, an Australian fintech that offers business multi-currency accounts and international payments
ChipperCash, an African remittance and payment startup for both consumers and businesses
CurrencyWave, which offers multi-currency accounts and international payments to consumer and businesses
LemFi, a UK-based fintech offering multi-currency accounts and international payments to consumers
Majority, a neobank targeting immigrants in the US that may lack a Social Security number, as well as offering cross-border remittances
Payoneer, an international payment processing platform for businesses and freelancers
Truly, which offers multi-currency “global” business accounts and international payments
WireBarley, an international remittance service for consumers and businesses
Wise, which offers multi-currency accounts and cross-border payments to consumers and businesses
Yorbis, a multi-currency and cross-border service for businesses
At least three of these firms have run into legal issues. For example, Airwallex and Wise have been linked to a $5 million crypto “pig butchering” scheme, first reported by Fintech Business Weekly.
Wise’s relationship with another of its bank partners, troubled Evolve Bank & Trust, abruptly ended last October, after Wise allegedly facilitated transfers to Hamas-linked entities in Gaza.
And Payoneer, licensed as a money transmitter in the US, reached a settlement with the New York Department of Financial Services last November over sanctions violations.
Per that settlement, Payoneer facilitated 2,220 commercial transactions from 2013 through 2018 to entities in sanctioned jurisdictions like Iran, Crimea, Sudan, and Syria, as well as to individuals on the Specially Designated Nationals (SDN) list.
NYDFS found that Payoneer’s OFAC compliance program failed to detect near-matches to SDN list entries, failed to screen for Business Identifier Codes when available, and permitted flagged payments to be released without review when staff couldn’t complete reviews in a timely manner.
Payoneer cooperated with the NYDFS’ investigation and agreed to pay a $1.25 million fine to settle the matter.
In addition to its partners that focus on multi-currency accounts and cross-border payments, CFSB also has partnered or currently works with a number of programs that offer accounts to consumers or businesses located outside of the US and to those inside the US, who may lack typically required documentation, like proof of address or a US SSN or ITIN.
Comun, a neobank focused on immigrants in the US
Coppel, a Mexican department store that offers Coppel Access, a digital wallet and remittance service
Inter, a Brazilian bank that offers US consumer and business accounts to users in Brazil
MyBambu, which offers US consumer bank accounts and remittances to users who may lack typically required identity documents
Nomad, which offers US consumer bank accounts, remittances, and investing to users in Brazil
Zolve, which offers US consumer bank accounts, credit cards, and related products, primarily targeting foreign students in India who plan to attend school in the US
A cursory review of CFSB’s partners’ sites reveals a handful of common missteps, like potentially deceptive language describing their offerings as “banking” without proper disclaimers and improper use of FDIC language by failing to proximately specify the insured depository institution.
This isn’t to say that programs serving customers in the US that lack traditional documentation or customers residing outside the US are inherently unworkable, from a legal and compliance standpoint — only that they entail different risks than serving typical retail consumer or business customers and thus necessitate appropriate compliance controls and oversight.
CFSB has also worked or presently partners with a handful of crypto-focused companies, including exchange Crypto.com and Cogni, which offers a traditional checking account through CFSB alongside a crypto wallet.
Wise, Revolut Impacted By CFSB’s Changing Risk Appetite
Now, it appears CFSB is derisking — though it couldn’t immediately be discerned if this was a proactive move on CFSB’s part, or in response to regulatory pressure or a potential enforcement action.
A CFSB spokesperson told Fintech Business Weekly that the bank is “not currently under an enforcement action, nor do we have knowledge of any pending regulatory enforcement action.”
Regulators have tools other than formal, public enforcement actions, including issuing “matters requiring attention” (MRAs), which are not enforcement actions and the existence of which is typically treated as non-public confidential supervisory information.
Wise, particularly popular outside the US for offering USD-denominated bank accounts with routing and account numbers that allow foreigners to accept ACH and wire payments within the US, seems to have been particularly hard hit by CFSB’s changing risk appetite.
The remittance service has ceased offering new USD account credentials or debit cards through CFSB.
Wise recently restarted offering account credentials through a new relationship with Column Bank, but only for personal accounts for individuals residing in the United States.
The company continues to be unable to offer debit cards to any US users.
Businesses, regardless of location, and individuals outside of the US are directed to add their name to a waitlist for if and when account credentials become available again.
Asked about the disruption, a Wise spokesperson told Fintech Business Weekly in part, “This pause does not impact customers with existing USD account details and Wise cards who can continue to use their Wise account as normal. Customers who are interested in accessing USD account details or getting a new Wise card can join our waitlist.”
A CFSB spokesperson responding to questions about changes to its partners’ offerings told Fintech Business Weekly in part (spacing adjusted):
“While we cannot speak about the specific circumstances of individual programs, we can confirm that we have maintained strong relationships with both Wise and Payoneer for close to a decade and continue to do so.
However, our clients oftentimes have several bank partners, international operations and operational and technical complexity that goes well beyond their relationship with CFSB, and the circumstances of any individual client does not necessarily reflect on their relationship with the Bank.”
UK-based neobank Revolut, which sought a new bank partner after its last one, Metropolitan Commercial Bank, was hit with an enforcement action, informed users last week that, after “careful consideration,” it was abandoning its plan to partner with CFSB, instead choosing to work with Lead Bank:
Asked about the scuttled relationship with Revolut, a CFSB spokesperson said, “[W]hile we acknowledge working with Revolut for a potential relationship, CFSB and Revolut mutually agreed to not move forward at this time.”
And it’s not just fintech partner programs that seem to be impacted by CFSB’s changing risk appetite or a potential regulatory action.
Just this April, CFSB filed an application to open a branch in Delaware — a move that would allow it to power lending programs without the constraint of New York’s 16% usury cap.
But less than three months later, CFSB withdrew its application, suggesting the bank had reason to believe its regulator, the OCC, was unlikely to approve it.
Asked about the abrupt withdrawal of its branch application, a CFSB spokesperson told Fintech Business Weekly that the bank “determined that opening a Delaware branch is not essential to our objectives at this time, although we may reevaluate opening a new branch in the future.”
Given the current climate around banks that have “complex, technology-driven” partnerships, particularly those that involve “intermediate platform providers,” it wouldn’t be a surprise if CFSB is facing some kind of regulatory pressure, formal or otherwise, to improve its oversight of its fintech partners and better manage third-, fourth-, and fifth-party risks.
Whether or not there’s a regulatory issue in play, CFSB’s moves to de-risk by offboarding certain programs or capabilities speaks to the continued uncertainty for fintech programs and, by extension, their end customers.
Transitioning to a new a partner bank is a time-consuming, expensive, and disruptive endeavor — and that’s if you’re lucky enough to find a new bank to work with.
Nine Congressional Reps Demand Regulatory Response To Synapse Disaster As Bankruptcy Drags On
Last week saw a status report and hearing as the Synapse bankruptcy saga enters its fourth month.
Key developments in the approximately two weeks since Chapter 11 Trustee and former FDIC Chair Jelena McWilliam’s last status report include:
Lineage Bank began releasing FBO funds and has disbursed nearly $50 million in payments, or about 80% of the FBO funds it originally held
Lineage’s status update says that “Synapse’s final trial balance attributes a different purported FBO account balance to Lineage than the actual cash balance at Lineage that has been verified against the Federal Reserve’s records and contains other deficiencies and contradictions,” suggesting the amount of cash Lineage holds may be less than what Synapse’s trial balance reports say should be there
AMG disbursed an additional $1 million and has just over $1 million of FBO funds remaining to distribute
American Bank still does not know to whom the $43,000 it holds belongs
FBO funds summary from the Chapter 11 Trustee’s most recent status report Evolve now is the only bank that has not disbursed any FBO funds, continuing to argue that Synapse’s ledgers contain unexplained inaccuracies and are not reliable
Per the status hearing on Friday, Evolve and its third-party consultant, Ankura, have completed gathering data needed for reconciliation and are on track to complete reconciliation in approximately eight weeks — which would mean some users will have waited nearly six months to get their funds back
The estimated shortfall remains the same, between $65-$96 million
The Trustee acknowledged public statements former Synapse CEO Sankaet Pathak has made about alleged actions that led to the potential shortfall, saying, “The Trustee and her advisors have been aware of the information and views of Mr. Pathak’s based on previous conversations and Synapse records and continue to have open lines of communication with Mr. Pathak and other former Synapse executives regarding these and other topics related to reconciliation and the potential sources of any shortfall.”
Sankaet Pathak’s allegations about the cause and amount of the potential funding shortfall
Reps Ask Regulators To Help Their Constituents, Update Third-Party Guidance
Earlier this month, nine Democratic Congressional representatives sent a letter to the leaders of the four main federal banking regulators, the Federal Reserve, the OCC, the FDIC, and the CFPB.
The letter was signed by Jimmy Panetta (CA-19), Jan Schakowsky (IL-09), Bill Foster (IL-11), Sylvia Garcia (TX-29), Juan Vargas (CA-52), Sean Casten (IL-06), Adam Smith (WA-09), Seth Moulton (MA-06), and Anna Eshoo (CA-16).
The representatives requested that the regulators use their “existing authorities and take concrete steps to help our constituents who were affected by the bankruptcy of Synapse Financial Technologies,” continuing to say that “[o]ur constituents opened accounts that advertised FDIC insurance assuming that meant their money was safe. Now, they understandably feel betrayed.”
The letter also requested that bank regulators update the recently issued joint third-party risk management guidance to speak more directly to bank-fintech partnerships.
The representatives wrote that “the guidance should be further refined to set specific expectations for managing the risks associated with fintech partnerships. This could include developing specialized examination manuals for banks to assess information about potential fintech clients.”
Finally, the representatives asked the bank regulators to conduct a thorough review of the situation — something they have seemingly been seeking to avoid — and report back to Congress, including “an assessment of any authorities needed to better oversee the fintech industry.”
Other Good Reads & Listens
💰 The Future of Credit Risk Decisioning (Fintech Takes with Chaos Engineering)
Why doesn't the USA have a Nubank scale Digital Bank? (Fintech Brainfood)
Interlinking Fast Payment Systems (Fed Governor Waller)
Statement on Prompt Accountability for Misconduct by FDIC Executives (Director Jonathan McKernan)
FTA Comment Letter re: the CFPB Request for Comment on its Earned Wage Access Proposed Interpretive Rule (Financial Technology Association)
he Role of Nonbanks and Fintechs in Boosting India’s UPI Person-to-Merchant Transactions (Federal Reserve Bank of Kansas City)
Issue Spotlight: Cash-back Fees (CFPB)
Listen: Hot Take: Brokered Deposits Join the Eras Tour (Breaking Banks)
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