The US Federal Reserve Board’s June cease-and-desist order against Evolve Bancorp and its subsidiary, Evolve Bank & Trust, came in response to a series of alarming deficiencies in its risk management, anti-money laundering (AML), and compliance practices. The order wasn’t just a regulatory formality—it was a stark warning to the entire financial sector about the dangers of neglecting foundational safeguards in the pursuit of growth.
Evolve Bancorp has positioned itself as a key player in the burgeoning Fintech landscape, offering a range of services through its open banking division (OBD), including deposit accounts and payment processing for fintech companies. However, an examination by the Federal Reserve in 2023 revealed that Evolve had “engaged in unsafe and unsound banking practices by failing to have in place an effective risk management framework” for these partnerships. The consequences were swift: Evolve was ordered to halt new Fintech partnerships, business lines, and products until it could prove it had shored up its risk management and compliance efforts.
The bank now faces tight deadlines to submit improved lending and credit risk management policies, alongside an enhanced internal audit program. Despite Evolve’s reassurances that these issues wouldn’t affect its existing customers, the damage to its reputation—and the broader implications for the industry—were clear.
The Evolve Bancorp case serves as a powerful reminder of the risks that come with rapid expansion lacking proper compliance frameworks in place. At the heart of the Federal Reserve’s order were three critical areas where Evolve fell short: risk management, AML compliance, and overall regulatory adherence—the bedrock of trust in the financial industry.
As Fintechs continue to evolve at breakneck speed, banks entering in partnerships with them will face similar challenges, where the pressures of innovation collide with the realities of risk and regulation. This is where artificial intelligence (AI) can—and must—play a transformative role.
One of the most significant advantages of AI is its ability to process and analyze vast amounts of data in real-time. For Evolve, this could have translated into a more robust risk management framework, one that could identify potential vulnerabilities before they escalated into a full-blown crisis. Machine learning algorithms could have provided early warnings about the risks associated with Evolve’s new fintech partnerships, allowing the bank to take proactive measures rather than waiting for regulators to step in.
Evolve’s AML compliance failures were a direct result of outdated and insufficient monitoring systems. AI offers a solution by automating the compliance process, ensuring that financial institutions adhere to regulatory requirements in real-time. With AI, Evolve could have implemented continuous monitoring systems that automatically flagged suspicious transactions and ensured that the bank remained compliant with AML laws—avoiding the scrutiny and penalties that followed.
Moreover, AI-driven risk management tools could have moved Evolve from a one-size-fits-all approach to a more nuanced, risk-based strategy. Predictive analytics powered by AI would have enabled Evolve to foresee potential risks and take preventive measures, reducing the likelihood of regulatory breaches and the associated penalties.
The Federal Reserve’s order emphasized the importance of having a qualified compliance officer with full autonomy and meaningful decision-making authority. AI could have empowered compliance officers at Evolve by increasing process efficiency and delivering actionable insights to enhance decision-making. These tools could have ensured that compliance officers were not only well-informed with a holistic view of their risks but also well-equipped to enforce regulatory standards effectively.
Evolve Bancorp’s experience serves as a cautionary tale for the banking industry, illustrating the high costs of reactive management. The lesson is clear: financial institutions must be proactive in their approach to risk management and compliance, and AI is the key to achieving this.
For financial institutions, the time to embrace AI is now. The question is not whether AI will transform the industry but whether financial service providers will leverage it wisely to build a more resilient future. Continuous improvement and adaptation are crucial; AI systems must be regularly updated and fine-tuned to keep pace with evolving threats and regulatory changes.
As the financial crime landscape continues to evolve, those who succeed will be the ones who not only innovate but do so responsibly, with a keen eye on the risks that come with progress. AI offers the tools to achieve this balance—if we are willing to use them.
The future of finance is bright, but only for those who are prepared to navigate it with foresight, adaptability, and a commitment to doing things right.
Peter Reynolds is ThetaRay’s CEO and the driving force behind the company’s vision to become the industry standard in AI-powered AML. He is an accomplished Fintech executive with extensive experience building world-class, high-performing organizations.