Leveling the Financial Innovation Playing Field Without Unnecessary Compliance Risk

‍Who should read this article: CEOs, COOs, CCOs and business development professionals of regional banks and credit unions. 

Retail banking is especially challenging at this point in time. Innovation abounds in financial services, and people are increasingly looking for higher returns than many traditional bank and credit union investments can generate. Consumers are constantly bombarded with stories and advertisements about new types of products such as virtual currencies and other digital assets, as well as investments such as exchange-traded and other types of funds. The returns on these products can be impressive, and smart investors are always looking to diversify. However, these types of investments are not available from the neighborhood bank or credit union. Consumers must go elsewhere to investigate what is out there, and invest their money.

The challenge for traditional retail banks and credit unions is that most of these products can only be offered only through licensed broker-dealers, and for new digital investment vehicles, other nontraditional sources. Most large nationwide and super-regional banks have affiliated broker-dealers, of course, but even then, the offerings can be somewhat limited. Community banks and credit unions are even more constricted, as they typically do not offer any alternatives or resources for their customers to investigate and possibly invest in the types of products consumers increasingly want. 

The consequences of this continued expansion of financial investment opportunities to community banks and credit unions are twofold: 

1) outflows of funds; and 

2) limited opportunities to attract new customers. 

Without opportunities for customers to explore new investment possibilities, customers redeem their certificates of deposit, limited mutual fund investments, and savings accounts, and move those funds to other firms that provide access to these interesting and exciting products. Similarly, without a more diverse range of investment vehicles to offer (beyond traditional retail banking products), banks and credit unions cannot expect to attract and retain a significant portion of their customers’ and prospects’ portfolios. 

This creates an obvious need for small and midsize financial institutions to seek new avenues to compete in the modern financial marketplace. For many reasons, it is impractical to expect a small bank or credit union to establish an in-house broker-dealer, and even if it were easy (and obviously it’s not, or everyone would do it, as the saying goes), even more specialized expertise is required to deal in emerging markets such as cryptocurrencies, non-fungible tokens (or NFTs), and other digital assets. There is just too much risk, not to mention the staffing and compliance challenges involved, to do it in-house. 

But what if there were a way to establish a relationship with a third party who could provide access to these products and markets to the institution’s customers and prospects under the bank’s/credit union’s umbrella? This would allow the opportunity to provide a full suite of options to the institution’s customer base, and retain (if not expand) their relationship. Reduce outflows. Retain existing customers. Attract new customers. Expand your share of your customer’s wallet. The bank could take full advantage of the trust its customers place in it, which it has worked so hard to gain, and truly attain the status of a one-stop shop of financial opportunities. This puts smaller banks and credit unions on equal footing with the largest of the nationwide (and even multi-national) retail and investment banks. 

The next natural thought is that a relationship such as that would come with many risks, particularly compliance risks. There are risks in any third-party relationship, but it is particularly unsettling when that third party deals in products and services that are unfamiliar to many traditional bankers. Complex investment products can be challenging to even the most experienced investment firms, and crypto and digital technologies are a whole new ballgame entirely. Any third party that would work with a bank to offer such products to the bank’s customers would absolutely need to have the requisite expertise and experience to meet all the legal and regulatory compliance demands. It would have to provide the assurances, resources, and roadmaps to ensure the myriad requirements banks and credit unions face in this area are met. 

This is what Unifimoney is all about.

Unifimoney is a multi-asset digital wealth management platform for Financial Institutions.  By partnering with Unifimoney Community Banks and Credit Unions are able to offer a comprehensive suite of fractional, self directed digital wealth management services including both passive and active trading of over 10,000 equities and ETF’s, trading in over 70 crypto currencies and precious metals - gold, silver and platinum.  

Customers are authenticated in the banks existing digital banking channels when they log in successfully, they can view their investment balances and performance in the bank app or website, to transact the customer would need to click through via SSO into the Unifimoney environment.  Customers are therefore fully aware they are in a complimentary though separate business to their banking relationship.

When the customer buys or sells a holding the funds are automatically drawn from or sent back to the clients FDIC insured DDA account with the bank or credit union.  Unifimoney integrates with the FI’s core or digital banking provider so no further integration or development work is required by the bank to implement the service.  Integrations with Q2 and Jack Henry Banno have already been publicly announced with more in the pipeline.

By partnering with Unifimoney FI’s provide a compelling service proposition to their customers, negating the need to download multiple 3rd party apps and services to manage their money and investing all while stemming the outflow of deposits from your institution. 

There are a host of regulatory challenges in such an arrangement, and it is absolutely essential for a bank or credit union to be certain the risks are understood and addressed. There cannot be any increased residual compliance risk. For such an arrangement to work, it shouldn’t be necessary for a bank to hire an entire compliance staff to handle the additional requirements, or send existing staff to a month’s worth of training. And it isn’t – Unifi takes the responsibilities of compliance extremely seriously, and as a result provides the necessary resources and compliance management program elements to its client banks and credit unions. 

For example, there are three crucial compliance-related elements (among others) inherent in this type of arrangement:

1. Vendor Management. Regulatory attention to a bank’s or credit union’s vendors and third parties has increased significantly in recent years. There are many requirements to be met, from upfront due diligence and contract negotiation requirements, to ongoing monitoring and service level agreements, among many others. Unifi leaves nothing to chance here; everything from the necessary certifications, compliance program documentation elements, and continuing communication is part of the relationship. This cannot – and will not – be one-sided, where the bank or credit union is left solely responsible for ensuring these requirements are met. Unifi is truly a partner in this endeavor. 
2. Anti-Money Laundering (AML). Detecting and reporting financial crimes and suspicious activity is paramount to a bank’s regulatory responsibilities. Working with a third party that assists the bank’s customers invest in many types of products and services naturally involves a high degree of AML risk that clearly dovetails with the bank’s existing AML responsibilities under the Bank Secrecy Act (BSA). How does Unifi monitor for potential issues? How is potential fraud reported and addressed?  Unifi’s commitment to anti-fraud and monitoring capabilities, and how it works with its client banks and credit unions, is embedded into the bank’s own AML compliance programs.
3. Nondeposit Investment Product (NDIP) Guidelines. The most basic of regulatory requirements a bank or credit union must comply with are the Interagency NDIP guidelines, issued back in 1994. There are clear expectations of how banks advertise the types of products a Unifi relationship would provide to customers (meaning products not covered by FDIC deposit insurance), as well as how the relationship is handled. Unifi implicitly understands these requirements and provides the necessary guidance and resources to ensure banks and credit unions are in full compliance with the rules.

This is far from the only listing of regulatory requirements inherent in this type of arrangement. There are numerous consumer protection, privacy, and marketing and advertising requirements to consider, to name but a few. In addition, compliance management program elements such as complaint management and training are necessary to address. This white paper is merely the first in a series addressing these regulatory risks and issues, and in each we’ll discuss a particular topic or topics, and provide how a bank/credit union can comfortably participate in a third-party arrangement with Unifi without having to worry unnecessarily about compliance issues.

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Carl Pry, CRCM, CRP

Treliant LLC

‍Disclosure: Content, news, research, tools, market data and securities symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The content is not the opinion of Unifimoney Inc. or Unifimoney RIA (an SEC-registered Investment Adviser). The information provided is not warranted as to completeness or accuracy and is subject to change without notice. The information provided should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.