The Federal Deposit Insurance Corporation has proposed a rule that would require financial institutions to hold their fintech partners accountable for managing consumer banking data.
The FDIC was prompted to take action after the failure of fintech company Synapse, which cost banking customers millions. At the crux of Synapse’s collapse was its inability to keep accurate records of which funds belonged to which customers.
”The rule is necessary given the way the fintech landscape has evolved,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “This is not designed to be overly restrictive, punitive, or harmful to fintech innovation. Rather, it calls out something that should have been done and wasn’t.”
Commingling Funds
Third-party providers have become a popular means for banks to accelerate their digital transformation. Financial institutions have increasingly leaned on fintechs to do everything from onboarding customers to maintaining account ledgers.
The new FDIC rule would require banks to closely monitor accounts opened through their fintech partners, including tracking account ownership and maintaining accurate daily balances.
However, the issue with Synapse was not just that the company didn’t keep accurate records, it was that the fintech commingled customer funds.
“Synapse told its customers that their account was FDIC-insured because it was held at Evolve, an FDIC-insured bank,” Apgar said. “In reality, those funds were commingled with all the other Synapse customers in a common “For benefit of” or FBO account. Synapse kept subledgers on how much of the FBO account belonged to each customer. However, after Synapse went out of business, the subledgers disappeared. Evolve was supposed to audit the subledger reconcilement, but they left that up to Synapse.”
Resetting the Model
The FDIC would normally insure consumer deposits, but in the case of Synapse, they don’t know who to reimburse or how much. Even when the FDIC can’t directly reimburse customers, clear records of ownership and account balances allow bankruptcy courts to determine which funds should be returned to whom.
Synapse’s failure incensed regulators, who said the incident exposed a glaring weakness in the banking-as-a-service model. There has been widespread speculation that regulators would be forced into action, and the resulting rules could force a reset of the BaaS model. The FDIC’s newly proposed regulations appear to be the first step in that direction.
