Introduction
The burgeoning fintech and money services business (MSB) sectors present significant opportunities for banks seeking new revenue streams and customer bases. However, entering this line of business demands rigorous evaluation, strategic planning, and robust compliance frameworks. This blog post outlines key considerations and necessary steps for banks contemplating this market expansion, focusing on maintaining an effective risk-based BSA/AML and OFAC compliance program.
Step 1: Internal Evaluation Before Expansion
Before a bank can consider offering services to fintechs and MSBs, a thorough internal assessment is critical to ensure readiness for this expansion. This includes evaluating:
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- Compliance Culture: Does the bank foster a strong culture of compliance? Are the Board and senior management committed to supporting the BSA compliance functions with the necessary resources?
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- Leadership and Expertise: Is there a champion within the bank who will lead this new line of business? What is the current expertise level of the BSA/AML and OFAC compliance team? Do they have experience dealing with MSB accounts, and if so, what types and risk profiles?
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- Technological Readiness: Does the bank possess robust BSA/AML and OFAC compliance technology? Is this technology capable of effectively monitoring MSB-related transaction activities?
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- Financial Willingness: Is the bank prepared to make the initial investments needed to establish this new service line, understanding that profitability might take time as expertise is developed and new controls are validated?
Step 2: Determining the Scope of Service
Once the bank has confirmed its internal readiness, the next step is to precisely define the types of MSB and fintech customers that align with the bank’s risk appetite. It’s essential for the bank to establish a clear focus—whether it’s servicing principal check cashers operating within local markets, partnering with principal money transmitters that are primarily mobile phone-based, or collaborating with MSBs that extend agency to others. Choosing a specific focus not only streamlines the risk management process but also ensures that the bank can tailor its resources and strategies to effectively manage the unique risks associated with each customer segment.
Step 3: Board Approval and Strategic Direction
After a thorough evaluation and the determination of the scope of services, recommendations, along with a proposed budget and execution timeline, should be presented to the Board. It is critical to establish controls, such as requiring Board or Compliance Committee approval for the first set of customer engagements after the compliance function has vetted and recommended them. Furthermore, an upper limit should be set, ensuring the bank does not exceed the Board-approved maximum number of customers within its stated risk appetite until certain milestones are achieved. These include an independent review of the program with MSBs among the bank’s customer base, completion of a regulatory examination focusing on MSBs, and a BSA Officer’s evaluation of the implemented program. The evaluation should assess control effectiveness and determine if additional staffing or system changes are necessary before seeking Board approval to expand the MSB customer limit.
Upon approval, the bank must begin developing this new line of business by:
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- Updating Risk Assessments and Compliance Programs: The bank needs to update its BSA/AML and OFAC risk assessments and compliance programs to effectively address the unique risks presented by MSBs and fintechs.
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- Revamping Policies and Controls: Existing written policies and controls must be meticulously updated, and system enhancements implemented, particularly within the transaction monitoring and sanctions filtering systems.
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- Specialized Training: It is imperative to provide specialized training for the compliance, account opening, and sales teams to equip them with the necessary tools and knowledge to effectively manage the specific needs and challenges associated with MSB and fintech clients.
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- Engagement with Regulators: Proactively engaging with regulators to discuss the bank’s business plans and compliance strategies can garner valuable feedback and guide the successful implementation of these services.
Red Flags Indicating Non-readiness
It’s crucial to recognize signs that the bank may not be ready to effectively service MSBs:
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- Weak Culture of Compliance: A robust culture of compliance is foundational. If the bank’s compliance culture is weak, or if compliance, risk management, sales, marketing, IT, and operational teams operate in silos rather than as a cohesive unit, addressing these gaps should be a top priority.
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- Insufficient Compliance Resources and Expertise: The effectiveness of regulatory compliance directly correlates with the availability of knowledgeable compliance personnel. Without a dedicated and skilled compliance team, the bank risks falling short of regulatory standards and effectively managing MSB-specific risks.
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- Lack of Clear Strategic Focus: A clear and well-understood strategy tailored to the MSB market is critical. The absence of a strategic focus can lead to misalignment between the bank’s capabilities and the demands of the MSB sector.
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- Technological Inadequacies: Adequate technology is essential for managing the increased transaction volume and complexity associated with MSBs. Technological shortcomings can lead to significant operational and compliance challenges.
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- Inadequate Funding: Initial and ongoing investments in compliance infrastructure and technology are vital. Insufficient financial support may impede the bank’s ability to sustain necessary enhancements, affecting service quality and compliance.
Before undertaking significant new opportunities, such as entering the MSB market, the bank must address these foundational aspects to ensure readiness for successful expansion.
Conclusion
Expanding banking services to include fintechs and MSBs offers promising opportunities but also requires banks to navigate substantial regulatory landscapes and establish stringent compliance measures. With meticulous planning and preparation, banks can effectively capitalize on these dynamic sectors while maintaining robust compliance standards.
Ready to Learn More?
The Money Services Business Association (MSBA), in association with BankerCollege powered by BankersHub, is pleased to offer specialized training through its MSB Banking Certificate Program. This program delves into the fundamental principles needed to vet, underwrite, and onboard approved MSB relationships at banks. It provides an in-depth overview of what MSBs are, what they do, and how to properly underwrite and approve the right type of MSB for your institution.
If you are a banker looking to explore new revenue streams and advance your institution in a risk-based manner, this Money Services Business Certification course is designed just for you.
Disclaimer:
This blog post is intended solely for informational purposes and should not be considered as legal, accounting, or professional services advice. Authored by professionals with expertise in BSA/AML and OFAC compliance, the content is deemed reliable as of the publication date. Nonetheless, for guidance tailored to your unique situation, we strongly advise consultation with qualified professionals in compliance consulting, legal, or accounting fields. The effectiveness of the strategies and practices discussed may depend on the specific risks your financial institution encounters. It is essential to customize these approaches to suit your institution’s unique risk profile and tolerance.
Jay Postma, CAMS, CFCS
President of MSB Compliance Inc.
Associate Member of Money Services Business Association
