US Regulator Proposes Stricter Rules for Banks Partnering with Fintechs

The Federal Deposit Insurance Corporation wants banks to know exactly whose money sits in the pooled accounts that fintech partners open, and to square each person’s balance against the ledger every day. Its board backed the proposed rule on September 17. The Federal Register printed it October 2, with public comment open through December 2.

What the proposal requires

For each covered account, a bank would maintain a ledger naming every underlying owner, the amount attributed to that owner and the ownership category of those funds. Balances would be matched owner by owner each day. The bank’s primary federal supervisor would check compliance and could force it. Banks would also need written procedures, an annual certification signed by a senior executive, and a yearly report filed with the FDIC and the bank’s own primary regulator.

Three conditions bring an account into scope. It exists for the benefit of the underlying owners, it pools money from more than one of them, and an owner can instruct a payment, via the account holder, to someone else. Accounts opened before the rule would be swept in as well.

Outsourced ledgers

Many programs hand ledger-keeping to a middleware provider, which the proposal permits subject to conditions. The bank needs uninterrupted, direct access to the owner-level data even if the vendor fails or enters bankruptcy. The data must be reconciled, and someone independent of the vendor must validate it from time to time.

Why now

The agency points to the collapse of Synapse, a middleware company that connected fintechs with partner banks. Synapse sought bankruptcy protection in late April 2024, and early the next month one partner bank froze funds that had come in through Synapse and its fintech customers. A court-appointed trustee took over on May 24. Since May the FDIC has fielded over 1,000 inquiries and complaints from consumers. It says the trustee indicated the money held at the banks looked short of what the fintechs owed their users. The agency adds that the parties dispute many facts of the case, though the events behind the proposal, it says, are not in question.

Chairman Martin Gruenberg described the plan as “an important step” toward making sure banks know who truly owns the deposits a third party places with them. The FDIC repeats that its insurance responds to the failure of a bank, and gives no protection when a non-bank firm defaults or goes bankrupt.

Same-day merger policy

The board also adopted a final policy on bank mergers that day. Deals producing an institution with assets of $100 billion or more face added financial-stability review, public hearings are expected once a combined bank passes $50 billion, and competition review may weigh small business and residential lending, not only deposits. It supersedes a 2008 policy.

What it means for funders

The proposal targets consumer-facing fintech balances and never mentions funders, so the link is indirect. A non-bank funder that operates through a partner bank, or parks merchant money in pooled accounts, could find that bank asking for owner-level data and tighter controls if the rule becomes final. That is an inference, not something the FDIC says. The proposal still faces its comment period, and no final rule has been set.

Sources

• FDIC, “FDIC Proposes Deposit Insurance Recordkeeping Rule for Banks’ Third-Party Accounts,” press release, September 17, 2024. https://www.fdic.gov/news/press-releases/2024/fdic-proposes-deposit-insurance-recordkeeping-rule-banks-third-party
• Federal Register, “Recordkeeping for Custodial Accounts,” FDIC notice of proposed rulemaking, 89 FR 80135, October 2, 2024 (via GovInfo). https://www.govinfo.gov/content/pkg/FR-2024-10-02/html/2024-22565.htm
• FDIC, “FDIC Board of Directors Approves Final Statement of Policy on Bank Merger Transactions,” press release, September 17, 2024. https://www.fdic.gov/news/press-releases/2024/fdic-board-directors-approves-final-statement-policy-bank-merger