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

by Manatt, Phelps & Phillips, LLP

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.

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