Goldman Warned by Fed Over FinTech Risk

The Federal Reserve has issued a warning to Goldman Sachs regarding risk and compliance oversight at its FinTech unit.

The regulatory concerns raised by the Fed have prompted a halt in the acquisition of riskier FinTech clients by a division of Goldman Sachs’ transaction banking business. This warning serves as a setback for Goldman Sachs’ plans to expand into new businesses and highlights the need for robust risk management and compliance practices in the FinTech industry.

According to the Financial Times, the concerns raised by the Federal Reserve revolve around insufficient due diligence and monitoring processes when accepting high-risk non-bank clients. Specifically, the regulator has highlighted issues within the team responsible for providing banking infrastructure to FinTech clients, including popular payment startups Stripe and Wise. However, the criticism does not extend to the other business segments of Goldman Sachs’ transaction banking unit, such as cash payment services.

This warning from the Federal Reserve comes at a challenging time for Goldman Sachs, as some employees within the FinTech unit have also raised concerns internally about a tendency to downplay risks. The bank has reportedly investigated at least one internal complaint from an employee regarding this matter.

The Fed’s criticism serves as a setback to Goldman Sachs’ plans to expand into new businesses under the leadership of CEO David Solomon, as reported by PYMNTS. Transaction banking was identified as one of the growth initiatives by Solomon during a 2020 investor day.

The bank aimed to leverage its corporate franchise, risk management expertise, and innovative culture to develop modern digital products while diversifying its revenues and funding mix. However, the recent regulatory scrutiny poses challenges to these expansion efforts.

Goldman Sachs’ transaction banking business, which operates within the Platform Solutions division, offers banking infrastructure to FinTech companies that do not possess a U.S. banking license.

While the business is relatively small for the Wall Street giant, the bank has set a target of generating approximately $750 million in revenues from this area by 2024. The Federal Reserve’s investigation into Goldman Sachs’ FinTech unit is part of a broader regulatory scrutiny of non-bank financial actors.

Goldman Sachs has refrained from commenting on the specific supervisory matters related to the regulators’ concerns. The bank’s response has been limited to stating that they are not permitted to comment on such matters. Similarly, the Federal Reserve has declined to provide any further comments on the issue.