On September 17, the Federal Deposit Insurance Corporation (FDIC) announced a notice of proposed rulemaking (Proposal) aimed at enhancing recordkeeping for bank deposits received from fintech and other third-party, non-bank companies. The FDIC is accepting public comments on the Proposal for 60 days after publication in the Federal Register.
Banks typically hold direct customers’ funds in individual deposit accounts designated for each customer on their own ledger. However, fintech companies, fintech intermediaries, and non-bank companies often partner with banks in payments and deposit programs. End user or other third-party funds originated through those partners are often held in a single custodial account at a bank with the bank partner responsible for maintaining the ledger of the amounts owned or held for the benefit of those third parties.
Under the Proposal, FDIC-insured banks holding certain accounts — what the FDIC calls “custodial accounts with transactional features” — would be required to take specific steps to ensure accurate account records are maintained. This includes the bank having “direct, continuous, and unrestricted access to the records of the beneficial owners, including, but not limited to, in the event of the business interruption, insolvency, or bankruptcy of the third party.” The bank would be required to complete a daily reconciliation of these records. The Proposal also provides for oversight by the banks’ primary federal supervisor to review compliance with this rule and enforce compliance if the bank fails to meet these requirements.
The FDIC has taken several actions in recent years to address risks related to third-party deposit relationships. These include issuing information on supervisory observations regarding bank arrangements with fintechs, soliciting input on bank-fintech arrangements, modernizing deposit insurance sign and advertising requirements, and launching a public awareness campaign, “Know Your Risk. Protect Your Money.” These efforts aim to reach consumers using alternative banking services that may appear to be FDIC-insured, but are not.
The Proposal ties into our recent blog, where we explored the complexities and risks associated with bank-fintech partnerships. As we discussed, the Synapse bankruptcy revealed flaws in the partnership ecosystem, but did not negate the long-term benefits of bank-fintech collaborations.
The Proposal is a sensible step towards ensuring that banks and fintechs closely examine the structure of their relationships and maintain accurate records, which is parallel to industry-led standard-setting efforts already underway. At the same time, the Proposal would greatly benefit from additional clarity in terminology, including the newly-defined terms “custodial account with transactional features” and “account holder.” These terms are confusingly similar to terms used in other rules, and may have the unintended consequence of short circuiting ongoing efforts to build a comprehensive, and more precise, industry-wide lexicon.