FDIC Clarifies Supervision of Bank/Third-Party Payment Processor Relationships

by Manatt, Phelps & Phillips, LLP
Contact

In an effort to rectify “misunderstandings” and get out of the line of political fire, the Federal Deposit Insurance Corporation (FDIC) issued updated guidance to clarify its supervisory approach to institutions establishing account relationships with third-party payment processors.

The misunderstandings in question: Operation Choke Point and attempts by the Department of Justice and the banking agencies to squeeze certain businesses, such as payday lenders, out of the banking system.

FDIC Financial Institutions Letters (FIL) FIL-41-2014 explains that existing guidance and an informational article published by the regulator provided categories of businesses that had been associated by the payments industry with higher-risk activity. The lists – which included debt consolidation, online gambling, credit repair, payday and subprime loans, pornography, pharmaceutical sales, and online firearms and tobacco sales companies – were intended to be illustrative, and not a ban on relationships with such businesses, the FDIC said.

The lists “have led to misunderstandings” regarding the regulator’s supervisory approach, “creating the misperception that the listed examples of merchant categories were prohibited or discouraged,” the FDIC wrote.

In fact, “it is FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law.” Instead, the FDIC “encourages depository institutions to serve their communities,” and when “an institution is following the outstanding guidance, it will not be criticized for establishing and maintaining relationships with [third-party payment processors].”

To clarify its guidance, the FDIC removed the lists of merchant categories from prior publications, including FIL-127-2008, Guidance on Payment Processor Relationships; FIL-3-2012, Payment Processor Relationship, Revised Guidance; FIL-43-2013, FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities; and an article from September 2011, “Managing Risks in Third-Party Payment Processor Relationships.”

For example, the updated FIL-43-2013 emphasizes that the “proper management of relationships with merchant customers engaged in higher-risk activities is essential,” and financial institutions “need to assure themselves that they are not facilitating fraudulent or other illegal activity.”

To achieve compliance with regulatory standards, the FDIC reminded financial institutions “to perform proper risk assessments, conduct due diligence sufficient to ascertain that the merchants are operating in accordance with applicable law, and maintain appropriate systems to monitor these relationships over time.”

FDIC examinations will focus on “whether financial institutions are adequately overseeing activities and transactions they process and appropriately managing and mitigating related risks.”

A lack of adequate oversight or failure to properly manage such relationships could result in financial or legal risk, the FDIC cautioned, but those institutions that operate with appropriate systems and controls “will not be criticized for providing payment processing services to businesses operating in compliance with applicable law.”

To read FIL-41-2014, click here.

Why it matters: Industry and legislative criticism caused the FDIC to choke on its own pronouncements of businesses considered unsavory in banking. However, bankers and their third-party payment processor customers should take no compliance comfort from the FDIC’s delisting of suspect merchants. As the FDIC recoils from its own relationship risk hit, do not expect examiners to back off from looking for fraud in all the bank’s spaces. Bank management will continue to have the burden of proof in examinations that they have adequate monitoring systems and controls in their third-party payment businesses and are not facilitating illegal activities or unauthorized, unfair or deceptive practices resulting in harm to consumers.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.