As regulatory scrutiny intensifies, a recent consent order against Lineage Bank in Franklin, Tennessee, underscores the growing imperative for bank boards to enhance oversight of fintech partnerships.

Formerly known as Citizens Bank and Trust until its rebranding in April 2021, Lineage Bank saw its assets more than triple over the past two years, reaching $291 million by the end of 2023. This growth was significantly driven by its banking-as-a-service (BaaS) platform, attracting notable clients such as Synctera and Synapse.

However, this strategy has been questioned following a consent order from the Federal Deposit Insurance Corp (FDIC), which frequently mentioned the term “fintech” — appearing 66 times within the document. This highlights the critical need for meticulous oversight of such partnerships.

Lineage Bank now joins other fintech-focused banks like Blue Ridge Bank in Virginia, First Northwest Bancorp in Washington, Cross River Bank in New Jersey, and Choice Financial in North Dakota, all of which have faced similar regulatory orders.

The FDIC emphasizes that the directors of Lineage Bank must play a crucial role in overseeing the bank’s fintech strategies. It is recommended that boards seeking to sponsor fintech initiatives equip themselves with appropriate training and educational tools to manage their BaaS strategies effectively.

Onboarding Protocols

The FDIC mandates that Lineage Bank’s board establish a comprehensive onboarding process for new fintech partners, which includes thorough due diligence. The board is also required to develop and implement an internal audit plan that rigorously evaluates controls for high-risk activities. These activities include managing onboarding deposits through third parties, processing payments, and overseeing sweeping deposits.

Importance of Adequate Staffing

Following the management upheavals, with a large investor ousting the previous board and management team, the consent order highlights the necessity for Lineage to engage a third party to assess the structure and capacity of the staff responsible for BaaS oversight and risk management.

Developing Exit Strategies

Moreover, the FDIC requires Lineage to formulate a detailed plan for the orderly termination of contracts with significant third-party fintech partners. This plan is crucial for ensuring effective and structured discontinuation of these partnerships.

Banking-as-a-service, previously seen as a potential growth avenue for smaller banks, now faces increased regulatory challenges. This environment compels banks to reevaluate their engagement in the BaaS space, encourages a more cautious approach, and may influence more fintech companies to seek their own charters, despite the complexities of the regulatory landscape.

Despite these challenges, the demand for sponsor banks remains high among fintechs, underlining the importance of diligent partner selection, robust staffing, and systematic onboarding and offboarding processes.