Month: April 2023

Using Fintech to Offer New Products- a Three-Part Series Part Two- Fintech is Here to Stay

Posted on by James DeFrantz

Fintech

While the overall public impression of banks and financial institutions took a major hit during the 2008 financial crisis, in large part, the damage was being slowly repaired.   However, it is obvious that the relationship between financial institutions and the public has changed forever.  Even before the coronavirus hit the economy, a  broad wave of consumer distrust buffeted the banking industry’s reputation over the past year, bringing an end to a run of positive change in public perception in the years after the financial crisis, according to the annual American Banker/Reputation Institute.  Let’s face it, the current times are not exactly the best for the image of banks.   In addition to the mortgage crisis, there have been several highly publicized scandals involving some of the larger and best-known banks.  The rollout of the current economic stimulus plan has had mixed results at best.  Even though many of these things go through cycles and the conventional wisdom is that “it will all blow over”, the current times are somewhat different

As pointed out in Bankshot[1] banking journal- “What’s at stake? Customers have more choice than ever when it comes to where they do their banking, including from an increasing array of fintech competitors with arguably less cultural and emotional baggage than the traditional banking industry.   Now, more than ever before, there are real alternatives to banking.

Most of these alternatives are being provided by financial technology companies AKA FinTechs.  As we note din the first part of this series, there is a huge potential pool of customers that FinTechs have been designed to meet; the unbanked and under banked.

The FDIC conducts a study of the number of households that are underbanked and unbanked in the Us every two years.  The most recent study was conducted in 2017.    The highlights from this study are as follows:

  • In 2017, 6.5 percent of U.S. households were “unbanked,” meaning that no one in the household had a checking or savings account. Approximately 8.4 million U.S. households, made up of 14.1 million adults and 6.4 million children, were unbanked in 2017.2 An additional 18.7 percent of U.S. households were “underbanked” in 2017, meaning that the household had an account at an insured institution but also obtained financial products or services outside of the banking system.
  • Specifically, a household is categorized as underbanked if it had a checking or savings account and used one of the following products or services from an alternative financial services (AFS) provider in the past 12 months: money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans. Approximately 24.2 million U.S. households, composed of 48.9 million adults and 15.4 million children, were underbanked in 2017.

The survey points out that a large portion of the population in this survey are turning to alternative financial institutions for their banking need.  The need for nontraditional banking services is one of the main drivers of the financial technical “fintech” industry.  Many bakers seem to understand that fintech companies present the possibilities for significant change in the industry.  According to a survey conducted by PWC:

  • FinTech is a driver of disruption in the market. Financial Institutions are increasingly likely to lose revenue to innovators, with 88% believing this already is occurring. The perceived business at risk trend has continued to rise, to 24% on average this year among all sectors.
  • Incumbents are becoming more aware of the disruptive nature of FinTech, shown well by the fact that, in 2017, 82% of North American participants believe that business is at risk, up from 69% in 2016. Insights from PwC’s DeNovo also indicate that 30% of consumers plan to increase usage of non-traditional Financial Services providers and only 39% plan to continue to use only traditional Financial Services provider. In addition, asset backed lenders have largely increased their share of lending (the lending club and other peer-to- peer business).

Fintech companies have been in the business of designing products that address some of the concerns raised by the unbanked or underbanked.  For example, speed of delivery, consideration of alternative means for credit underwriting and ease of delivery.

Despite the idea that fintech equals disruption, it doesn’t have to be a negative thing.  Disruption often results in improvement in efficient and better service.   In fact, there are several places where fintech companies and financial institutions, especially community banks have converging interests.

Community banks and credit unions have overall higher levels of trust and a better public image than their larger brethren.   Because community banks are smaller, they are more nimble and making changes to products lines can happen quickly and in response to customer needs.   The independent bankers association published the “Fintech strategy Roadmap in 2017” as a guide for the many opportunities that fintech companies can present.   A summary of these opportunities includes;

  • Increased Operational Efficiency and Scale
  • Increased Access to Customers with a Younger Age Demographic
  • Increased Access to Loan Customers in New Markets
  • Enhanced Brand Reputation
  • Enhanced Customer Experience

Disruption is simply that- it doesn’t necessarily have to be a bad thing.   In fact, disruption can result in greater efficiencies and more effective.  Some good news, these companies have done all of the research and development work with venture capital funds!   They have worked out a lot of the bugs that are usually part of delivery of a new product.   Some more good news, these companies are burdened by a regulatory scheme that really limits them.  That is that they are considered MSB’s and must get state licenses to operate in each state.  Because of this, many FinTechs are looking for a partnership with a bank- in this way they get around the need for licenses.

 

In Part Three, we will discuss best practices for partnering with Fintech Companies

***For More Information on FinTech’s and Financial Institutions visit http://www.VCM4you.com***

[1] https://www.americanbanker.com/bankshot

Using Fintech to Offer New Products- a Two-Part Series Part One- The Need for Speed

Posted on by James DeFrantz

Fintech

 

We hear a lot about fintech companies Financial technology, also known as FinTech, is a line of business based on using software to provide financial services. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.

The overall goal of Fintech companies include:

  • Efficient and speedy delivery of funds
  • Development of alternate means of solutions for ongoing problems
  • Especially in the financial industry there are a lot of naysayers, but the fact of the matter is that there are structural reasons for the potential success of FinTechs.  Underbanked and unbanked people represents a huge potential market.   The FDIC produces a great deal of information about the unbanked and under banked every two years. The study is called 2019 FDIC National Survey of Unbanked and Underbanked Households.   As of 2019, the combined number of unbanked and underbanked was almost 30 million people.

Fintech companies are pointed directly at the needs of the underbanked and unbanked

  • When thinking of a fintech, it is important to note that what they are trying to do is to get money to people is a manner that is both fast and cheap
  • FinTechs are also working on ways to meet the needs of a large group of people who are outside of the banking industry
  • Fintech companies understand that while not everyone has a banking account, mostly everyone has a cell phone or a similar electronic device

Using this technology, fintech companies are reducing the need for bank accounts. FinTech companies are really going after this population of people who for the most part are potential bank customers by providing solutions to problems that people have with banks.   One of the things that Fintech companies have focused on are the many uses of the smart phone.   For example, smart  phones can be used for stored value.  That is, just like a reloadable debit card, the smart phone can be used to reload value repeatedly.  Fintech companies such as Zoom, Square and Amazon are making it possible to transfer funds and store funds.  Other Fintech companies are changing the way that credit is underwritten.  Fintech also has increased a small institutions ability to offer different products and services.  As traditional means for profit become more scarce, Fintech opens the possibilities for additional income streams.

The 30 million people in the underbanked and unbaked populations are your potential customers!  The statistics show that this group is getting younger and more internet savvy.  The more that the customers use their smart phones, the less likely they are to rely on banks

 

Some examples of the many uses of a smart phone in the Fintech industry include the following:

  • Stored Value – A stored-value card is a payments card with a monetary value stored on the card itself, not in an external account maintained by a financial institution.  Stored-value cards differ from debit cards, where money is on deposit with the issuer, and credit cards which are subject to credit limits set by the issuer.
  • APIs – An open API is a publicly available application programming interface that provides developers with programmatic access to a proprietary software application or web service. APIs are sets of requirements that govern how one application can communicate and interact with another.
  • Nationwide Reach– Using data analytics, fintech companies can have access to customer behavior data and assist with marketing opportunities

For many of the unbanked, fintech companies represent a much-welcomed alternative to the use of high cost check cashers.  In addition, there are companies that are taking on Payday lenders who up to this point have not had a great deal of competition.

  • One of the other things that these companies do is give financial institutions the ability to offer products and services

Information is power and even for a small institution, if you are unaware of what your customers want and are going to want in the future, it is a problem.  The regulatory agencies that cover financial institutions have recognized this synergy and have issued guidance and taken steps that are designed to ease the process for relationships between financial institutions and Regtech companies.  These included:

  • Regulators are encouraging institutions to pool resources when it is feasible
  • Joint Statement on Banks and Credit Unions Sharing Resources to Improve Efficiency and Effectiveness of Bank Secrecy Act Compliance was issued in October of 2018
  • One of the main points of the statement is that there are ways that financial institutions can leverage what other banks or firms are doing
  • Fintech companies have the ability to help in a number of ways. Some of these companies have developed programs that are help with analytics and security
  • The Office of the Comptroller of the Currency has initiate the Fintech charter program that was designed to allow Fintech companies to have special banking powers. This charter has been called into question by a decision of a federal court that is now undergoing appeal.

Regardless of the outcome from the appeal of the Fintech charter, the regulatory agencies have noted that fintech and banking are a natural combination that will continue to grow and in scope and activity.

 

In Part Two we will discuss specific innovations oin Fintech

 

***For More Information on FinTech’s and Financial Institutions visit http://www.VCM4you.com***

BSA Risk Assessments- What’s the Point?

Posted on by James DeFrantz

 

Components of Risk Assessment Process

For those of you who have experienced a BSA examination or audit, you know one of the first things you are asked for is your BSA/OFAC risk assessment.  It has also likely been your experience to find a risk assessment deemed complete and not in need of some sort of enhancement is something of a “unicorn”.  In most cases, examinations and audits include a comment discussing the need to expand the risk assessment and to include more detail.  The detail required for a complete risk assessment is elusive at best.  Often, the right information for the risk assessment fits the famous Supreme Court definition of pornography- “you know it when you see it”.

 

The FFIEC BSA manual is not exactly helpful when it comes to developing risk assessments.   The manual directs every financial institution should develop a BSA/AML and an OFAC risk assessment.  Unfortunately, the form the risk assessment should take, or the minimum information required are left as open questions for the financial institution.   Thus, many financial institutions end up with a very basic document which has been developed to meet a regulatory requirement, but without much other meaning or use.

 

As financial institutions continue to change and the number of financial products and types of institutions offering banking services grows, the risk assessment can be something entirely different. Taking the approach that the risk assessment can be used to formulate both the annual budget request and the strategic plan, can change the whole process.

 

The FFIEC BSA examination manual specifically mentions risk assessments in the following section:

 

“The same risk management principles that the bank uses in traditional operational areas should be applied to assessing and managing BSA/AML risk. A well-developed risk assessment assists in identifying the bank’s BSA/AML risk profile. Understanding the risk profile enables the bank to apply appropriate risk management processes to the BSA/AML compliance program to mitigate risk. This risk assessment process enables management to better identify and mitigate gaps in the bank’s controls. The risk assessment should provide a comprehensive analysis of the BSA/AML risks in a concise and organized presentation, and should be shared and communicated with all business lines across the bank, the board of directors, management, and appropriate staff; as such, it is a sound practice that the risk assessment be reduced to writing” [1]

 

This preamble has several important ideas in it.   The expectation is, management of an institution can identify:

Who its customers are:  including the predominant nature of the customer base- are you a consumer institution or a commercial at your core?  Who are the customers you primarily serve?

What is going on in your service area:  Is it a high crime area or a high drug-trafficking area, both or neither?  The expectation is you will know the types of things, both good and bad going on around you.  For example, if you live in an area where real estate is extremely high cost, there might be several “bad guys” buying property for cash as a means of laundering money.   The point is you need to know what is going on around you at all times.

Where are the outlier customers:  Do you know which types of customers who require being watched more than others?  There are some customers who, by the nature of what they do, require more observation and analysis than others.  The question is, have you identified these high-risk customers?

How well are you set up to monitor the risks at your institution:  Do you have systems in place are up to the task to discover “bad things” going?  Does the software you use really help the monitoring process?   This analysis should consider whether the staff you have truly understood the business models your customers are using.  For example, if your customer base includes Money Service Businesses, do you have staff in place who know how money services business work and what to look for?  The best software in the world is ineffective if the people reading the output are not familiar with what normal activity at an MSB.

Ties to the strategic plan: Does the BSA program have the resources to match changes in products or services planned for the institution? For example, if the institution plans to increase the number of accounts offered to the money services business, does the BSA department have an increase in staff included in its budget?

 

Effective Risk Management

The information and conclusions developed in the risk assessment should be used for planning the year for the BSA/AML compliance program.  The areas with the greatest areas of risk should also be the same areas with the greatest dedicated resources.   Independent audits and reviews should be directed to areas of greatest risk.  For example, if there are many electronic banking customers at the institutions while almost no MSB’s, then the audit scope should presumably focus on the electronic banking area and give MSB’s a limited review.  Also, training should focus on the BSA/AML risks associated with electronic banking, etc.

Rethinking the Risk Assessment Process

Continued development of new products and processes in finance and technology (“fintech”) and BSA/AML have opened the possibility of a vast array of potential new products for financial institutions.  Products such as digital wallets and stored value on smartphones have opened new markets for people who have been traditionally unbanked and underbanked. Forward-thinking financial institutions should consider the possibility some of these new products have the potential to enhance income.

The ability to safely and effectively offer new products depends heavily on the ability of the compliance department to fully handle the regulatory requirements of the products.  When preparing the risk assessment, consider the resources necessary to offer new and (money-making products).

 

There are no absolute prohibitions against banking high-risk clients 

Per the FFIEC BSA Examination manual higher risk accounts are defined as:

“Certain products and services offered by banks may pose a higher risk of money laundering or terrorist financing depending on the nature of the specific product or service offered. Such products and services may facilitate a higher degree of anonymity, or involve the handling of high volumes of currency or currency equivalents” [2]

 

The Manual goes on to detail several other factors that should be considered when monitoring high-risk accounts.  We note the manual does not conclude high-risk accounts should be avoided.

The BSA/AML examination manual (“exam manual”) establishes the standard for providing banking services to clients who may have a high risk of potential money laundering.  Financial institutions are expected to:

 

  1. Conduct a risk assessment on each of these clients,
  2. Consider the risks presented
  3. Consider the strengthening of internal controls to mitigate risk
  4. Determine whether the account(s) can be properly monitored and administrated;
  5. Determine if the risk presented fits within the risk tolerance established by the Board of Directors.

 

Once these steps are followed to open the account, for high-risk customers, there is also an expectation there will be ongoing monitoring of the account for potentially suspicious activity or account abuse.    The exam manual is also clear; once a procedure is in place to determine and properly mitigate and manage risks, there is no prohibition against having high-risk customers.  The risk assessment section of the exam manual notes the following:

“The existence of BSA/AML risk within the aggregate risk profile should not be criticized as long as the bank’s BSA/AML compliance program adequately identifies, measures, monitors, and controls this risk as part of a deliberate risk strategy.”[3]

 

Once an account has been determined to be high risk, and an efficient monitoring plan has been developed, there can be various levels of what high risk can mean.    When a customer’s activity is consistent with the parameters which have been established and have not varied for some time, then the account can technically be high risk but not in practice.   For example, Money Services Businesses are considered “high-risk” because they fit the definition from the FFIEC manual.  However, a financial institution can establish who the customers of the MSB are and what they do.  A baseline for remittance activity, check cashing and deposits and wire activity can be established.   If the MSB’s activity meets the established baseline, the account remains “high risk” only in the technical meaning of the word.   Knowing what the customers’ business line is and understanding what the customer is doing as they continue without much variation reduces the overall risk.

Making the Case for MSB’s

Posted on by James DeFrantz

MSB!

For many thousands of workers in the United States, the end of the week renews a weekly ritual, payday.  For those workers who are expatriates, payday renews another ritual, the trip to the local money transmitter also known as Money Service Businesses.  Money Services businesses are defined by FinCEN as follows:

The term “money services business” includes any person doing business, whether on a regular basis or as an organized business concern, in one or more of the following capacities:

(1) Currency dealer or exchanger.
(2) Check casher.
(3) Issuer of traveler’s checks, money orders or stored value.
(4) Seller or redeemer of traveler’s checks, money orders or stored value.
(5) Money transmitter.
(6) U.S. Postal Service.

For many years MSB’s have served the needs of the expatriate workers who are sending money home.  The remittance market is a multi-billion-dollar business serving a large population of the people who tend to be underbanked or unbanked.

Storm Clouds

In 2013 the US Department of Justice initiated Operation Chokepoint.  This initiative was described in a 2013.

Operation Choke Point was a 2013 initiative of the United States Department of Justice, which would investigate banks in the United States and the business they do with firearm dealers, payday lenders, and other companies believed to be at higher risk for fraud and money laundering.[1]

The Justice Department’s decision to focus on the activities of MSB’s directly impacted their treatment by banks.  Soon, MSB’s became persona non-grata; the major theme was that these organizations have potential for money laundering and therefore had to be given scrutiny.   There was a second theme that was less prominent; the better the monitoring the lower the risk.   Eventually the regulators were forced to cease the initiative.  Unfortunately, a great deal of the stigma associated with MSB’s remains.

Community Banking Transitions

Today community banks are experiencing fierce competition for C&I and CRE while shrinking margins continue to make lending in these areas more expensive.   In the meantime, the main reason for community banking- serving the underserved is still an area that has a great deal of space for growth.  For example, in 2018, the FDIC estimated that 27% of all households were unbanked or underbanked.     

The Remittance Market

According to the World Bank, remittances to low- and middle-income countries reached a record high in 2018, according to the World Bank’s latest Migration and Development Brief.

The Bank estimates that officially recorded annual remittance flows to low- and middle-income countries reached $529 billion in 2018, an increase of 9.6 percent over the previous record high of $483 billion in 2017. Global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017.

Among countries, the top remittance recipients were India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion).

The average size of an individual remittance remains $200.00.   There are a number of money transfer businessess that have developed systems that are familiar to the customers and efficient in their delivery.  The forces created by operation chokepoint and the growing remittance market are creating great opportunities.  Despite the huge demand and potential for fee income, many MSB’s are in search of a banking relationship

Why Should a community bank consider an MSB relationship?

Because of the history, we have already discussed for many banks, the term MSB ends the discussion.  However, for those banks that are looking for ways to improve overall profitability; there are several positives to consider

o   Fee income:  Because the business model is built on small dollar transactions, there is a large volume of transactions.  Each transaction has the potential to generate fees.  The experience of banks that offer accounts to MSB’s has been a steady reliable source of fee income.

o   Small expenditures of capital:  The expenditure of capital that is necessary is largely dependent on the strength of your overall BSA compliance program.  At the end of the day, the financial institution must dedicate sufficient resources to monitor the activity of the MSB.

o   Extremely Low Cost:  The costs of the resources mentioned above can and often is covered by the client MSB.

o   Serving the underserved:   As we previously noted, the vast majority of the customers using MSB’s are part of the larger underbanked and unbanked population.

o   Opportunities for new markets, projects and a whole new generation of bank customers: Today’s MSB customer can easily be  tomorrow’s entrepreneur who opens a large business account at your bank.

MSB’s and Risk

For many institutions the decision has been made that the regulatory risk associated with Money service Business is too great to justify offering the product.  Of course, most who make this decision harken back to the struct scrutiny of Operation Chokepoint.

The fact that so many MSB’s lost their banking relationships caused the FDIC (the main “tormentor of financial institutions in this area) to issue FIL 5-2015 which was directed at the mass “de-risking” that banks were forcing on MSB’s.

The FDIC is aware that some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA). The FDIC and the other federal banking agencies recognize that as a practical matter, it is not possible for a financial institution to detect and report all potentially illicit transactions that flow through an institution.   Isolated or technical violations, which are limited instances of noncompliance with the BSA that occur within an otherwise adequate system of policies, procedures, and processes, generally do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance.

When an institution follows existing guidance and establishes and maintains an appropriate risk-based program, the institution will be well-positioned to appropriately manage customer accounts, while generally detecting and deterring illicit financial transactions.[2]

Put another way, the regulators were noting that despite the appears otherwise the principles for managing the risks of MSB’s still applied; the better the monitoring, the lower the risk.   When considering whether to offer an MSB a bank account, your financial institutions should be able to administrate the account to keep risks low.  In addition to the guidance published by the FDIC, FinCEN, the FFIEC and the other banking regulatory agencies have all published guidance making it clear that there are no absolute regulatory restrictions on banking MSB’s.

The time is now for community banking institutions to consider the possibility of banking relationship with MSB’s

 

[1]  Zibel, Alan; Kendall, Brent (August 8, 2013). “Probe Turns Up Heat on Banks”. The Wall Street Journal

 

[2] FIL 5-2015

 

Why Don’t examiners Like MSB’s

Posted on by James DeFrantz

diske

For many thousands of workers in the United States, the end of the week renews a weekly ritual; payday.  For those workers who are expatriates, payday renews another ritual, the trip to the local money transmitter also known as Money Service Businesses.  Money Services businesses are defined by FinCEN as follows:

The term “money services business” includes any person doing business, whether on a regular basis or as an organized business concern, in one or more of the following capacities:

  • Currency dealer or exchanger.
    (2) Check casher.
    (3) Issuer of traveler’s checks, money orders or stored value.
    (4) Seller or redeemer of traveler’s checks, money orders or stored value.
    (5) Money transmitter.
    (6) U.S. Postal Service.

For many years MSB’s have served the needs of the expatriate workers who are sending money home.  The remittance market is a multi-billion-dollar business serving a large population of the people who tend to be underbanked or unbanked.

Storm Clouds

In 2013 the US Department of Justice initiated Operation Chokepoint.  This initiative was described in a 2013;

Operation Choke Point was a 2013 initiative of the United States Department of Justice, which would investigate banks in the United States and the business they do with firearm dealers, payday lenders, and other companies believed to be at higher risk for fraud and money laundering.[1]

The Justice Department’s decision to focus on the activities of MSB’s directly impacted their treatment by banks.  Soon, MSB’s became persona non-grata; the major theme was that these organizations have high potential for money laundering and therefore had to be given scrutiny.   There was a second theme that was less prominent; the better the monitoring the lower the risk.   Eventually the regulators were forced to cease the initiative.  Unfortunately, a great deal of the stigma associated with MSB’s remains.

Community Banking Transitions  

Today community banks are experiencing strong  competition for interest margins in traditional business lines.  Competition for C & I and CRE has become fierce, making lending in these areas more expensive.   In the meantime, the main reason for community banking- serving the underserved is still an area that has a great deal of space for growth.   In 2016, the FDIC estimated that 27% of all households were unbanked or underbanked.

The Remittance Market

Remittances are a growing market that continues to grow according to the world bank statistics $138,165,000,000 in remittances was sent from United States to other countries in 2016.  The market is expected to continue to grow in the next few years.   The average size of an individual remittance remains $200.00.   There are a number of money transfer business that have developed systems that are familiar to the customers and efficient in their delivery.  The forces created by operation chokepoint and growing remittance market are creating great opportunities.  Despite the huge demand and potential for fee income, many MSB’s are in search of a banking relationship.

Why Should a community bank consider an MSB relationship?    

Because of the history we have already discussed for many banks, the term MSB ends the discussion.  However, for those banks that are looking for ways to improve overall profitability; there are several positives to consider

Fee income:  Because the business model is built on small dollar transactions, there is a large volume of transaction.  Each transaction has the potential to generate fees.  The experience of banks that offer accounts to MSB’s has been a steady reliable source of fee income.

Small Expenditures of Capital:  The expenditure of capital that is necessary is largely dependent on the strength of your overall BSA compliance program.  At the end of the day, the financial institution must dedicate sufficient resources to monitor the activity of the MSB.

Extremely Low Cost:  The costs of the resources mentioned above can and often is covered by the client MSB.

Serving the Underserved:   As we previously noted, the vast majority of the customers using MSB’s are part of the larger underbanked and unbanked population.

Opportunities for new markets, projects and a whole new generation of bank customers: Today’s MSB customer can easily be tomorrow’s entrepreneur who opens a large business account at your bank.

MSBs and Risk

For many institutions, the decision has been made that the regulatory risk associated with Money Service Business is too great to justify offering the product.  Of course, the most reason for this decision harkens back to the struct scrutiny of Operation Chokepoint.

The fact that so many MSB’s lost their banking relationships caused the FDIC (the main “tormentor of financial institutions in this area) to issue FIL 5-2015 which was directed at the mass “de-risking” that banks were forcing on MSBs.

The FDIC is aware that some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA). The FDIC and the other federal banking agencies recognize that as a practical matter, it is not possible for a financial institution to detect and report all potentially illicit transactions that flow through an institution.   Isolated or technical violations, which are limited instances of noncompliance with the BSA that occur within an otherwise adequate system of policies, procedures, and processes, generally do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance. When an institution follows existing guidance and establishes and maintains an appropriate risk-based program, the institution will be well-positioned to appropriately manage customer accounts, while generally detecting and deterring illicit financial transactions.[2]

Put another way, the regulators were noting that despite the appearance otherwise the principles for managing the risks of MSBs still applied; the better the monitoring, the lower the risk.   When considering whether to offer an MSB a bank account, your financial institutions should be able to administrate the account to keep risks low.  In addition to the guidance published by the FDIC, FinCen, the FFIEC, and the other banking regulatory agencies have all published guidance making it clear that there are no absolute regulatory restrictions on banking MSBs.

[1] Zibel, Alan; Kendall, Brent (August 8, 2013). “Probe Turns Up Heat on Banks”. The Wall Street Journal

[2] FIL 5-2015