US Regulator Proposes Stricter Rules for Banks Partnering with Fintechs

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US Regulator Proposes Stricter Rules for Banks Partnering with Fintechs

Sept 17 (Reuters) - A top U.S. banking regulator proposed new rules on Tuesday that would require banks to enhance recordkeeping for accounts managed by fintech companies on behalf of customers. This proposal follows the collapse of Synapse Financial Technologies earlier this year, which led to the freezing of thousands of accounts.

The Federal Deposit Insurance Corporation (FDIC) stated that the strengthened requirements are intended to ensure consumers have timely access to their funds, even if there is no bank failure. The FDIC also finalized new guidance on bank mergers, while the U.S. Justice Department announced it will withdraw from its 1995 bank-specific merger guidelines in favor of its broader merger rules finalized last year.

The FDIC's proposal requires banks working with fintechs to identify beneficial owners of each account and the corresponding balances. Third parties, like Synapse, could continue to maintain records if specific conditions are met, such as ensuring the bank retains unrestricted access to the data, even in cases of bankruptcy or insolvency.

Synapse filed for bankruptcy in April, resulting in account freezes for customers of its partner banks, including Evolve Bank & Trust in Tennessee, which had been working with fintech firms to offer services like deposit accounts. While the total number of affected customers is still unclear, regulators estimate that tens of thousands of accounts may have been impacted.

In June, a court-appointed trustee in the bankruptcy case identified an $85 million shortfall between Synapse’s partner banks and the amounts owed to depositors.

The FDIC also finalized a policy on Tuesday that will subject bank mergers creating entities with more than $100 billion in assets to increased scrutiny. This rule is largely in line with the FDIC's March proposal and marks the first update to the agency's merger guidelines in 16 years. The updated guidance places a particular focus on maintaining the stability of the banking sector, a priority first highlighted by agency officials in March.

Bank mergers and industry consolidation have faced heightened scrutiny since last year, after three of the largest-ever U.S. bank failures led to acquisitions and substantial losses for the FDIC's insurance fund. In a separate announcement, the Justice Department confirmed that its merger guidelines, developed with the Federal Trade Commission and finalized last year, will now serve as the overarching framework for mergers across all industries, including banking.

These regulatory moves reflect a broader effort to tighten oversight of bank mergers under President Joe Biden's administration. In 2021, Biden issued an executive order aimed at promoting competition, which prompted the Federal Reserve and the Justice Department to update merger guidelines.

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