The Federal Reserve Board has issued an enforcement action against Evolve Bancorp and Evolve Bank & Trust—which provides so-called banking as a service products to fintech companies—for failing to comply with anti-money-laundering, risk management, and consumer compliance programs, according to a statement today.
As part of the enforcement action, the Arkansas-based bank will have to strengthen its compliance with existing partners, such as “buy now, pay later” fintech giant Affirm, which earlier this week announced a partnership with Apple. Affirm declined to comment. In April, Evolve had customer funds associated with pig-butchering scams seized. It also provided banking services for fintech Synapse Financial Technologies, which went bankrupt in May. Evolve partners as well with banking fintech Mercury, which provides services for startups.
The Federal Reserve Board noted: “For current partnerships with financial technology companies, the Board’s action requires Evolve to strengthen its risk management practices to address potential risks, including compliance and fraud risks, by implementing appropriate oversight and monitoring of those relationships, including through enhanced procedures related to recordkeeping and consumer compliance programs.”
Konrad Alt of regulatory advisory firm Klaros Group says that many major players providing banking as a service products are under formal or informal enforcement actions. But that “each of these orders contains a little bit of regulatory innovation. Banks that are in the space will want to read the Evolve order carefully to see if it has implications for them.” In 2023, banking as a service banks accounted for 13.5% of “severe enforcement actions” issued by federal bank regulators, according to S&P Global Market Intelligence.
The Board’s enforcement action against Evolve is independent of the bankruptcy proceedings regarding Synapse, according to the statement.
In an email sent to to Fortune, an Evolve spokesperson acknowledged that the company had signed the receipt of a formal order from the Federal Reserve Board and the Arkansas State Bank Department and had agreed to take certain measures to “further bolster” its compliance oversight and risk management practices.
“We’ve made significant investments in technology and personnel in our enterprise risk management, compliance, and BSA/AML departments to strengthen oversight and enhance the risk framework,” the spokesperson wrote. “With the support of our senior management and board of directors, we’re confident this order’s impact will result in a stronger Evolve.”
According to the Fed, the action resulted from examinations conducted in 2023 that found that Evolve failed to have in place an effective risk management framework for its partnerships and did not maintain an effective risk management program. This was not part of a formal investigation.
Evolve called the examinations part of a “routine regulatory review” and said the order was similar to what others in the banking as a service industry had also received. Evolve noted that the Fed order “does not affect our existing business, customers, or deposits. Evolve remains well-capitalized and continues to show strong growth across all business lines.”
The Evolve board of directors has 90 days to submit a written plan to strengthen board oversight of the management and operations of the bank and the bank’s compliance with the Bank Secrecy Act and other anti-money-laundering regulations.
