The US Federal Deposit Insurance Corporation (FDIC) is exploring measures to safeguard customers from potential failures of fintech companies, according to a report by Bloomberg Law.
The report builds upon initial concerns voiced by the FDIC and two other federal banking regulatory agencies in late July. These agencies issued specific guidance mandating that all banks under their jurisdiction monitor and regularly reconcile any accounts they manage, irrespective of the account’s source or nature.
The FDIC, together with the Office of the Comptroller of the Currency and the Federal Reserve, released a rare joint statement seeking public feedback after issues arose with bank account reconciliations. This was particularly notable as thousands of clients faced difficulties accessing hundreds of millions in third-party account balances following the bankruptcy of a significant fintech intermediary in April.
Anticipation of New Regulations on Third-Party Reconciliation Requirements
New rules outlining the responsibilities of FDIC-insured institutions are anticipated later this month. These regulations will remind banks that they are fully accountable for any accounts and funds they hold, regardless of their source or the involvement of third-party relationships with fintech companies.
This forthcoming action by the FDIC implies that any federally insured bank operating in the United States or its territories will need to adhere to the clarified regulations. This may have far-reaching effects on existing bank-fintech relationships, particularly in terms of embedded finance and “for benefit of” (FBO) arrangements.
The increase in reconciliation and monitoring standards by a significant federal banking regulator may be arriving too late for many affected individuals. The sudden bankruptcy of Synapse Financial Technologies on April 22, 2024, impacted millions of dollars in customer accounts managed by numerous online financial service providers, including Dave Inc., Juno, Mercury, Yieldstreet, and Yotta, among others.
Impact of Synapse Bankruptcy on Customers
Synapse’s failure left many customers unable to access their funds, as it had positioned itself as a key intermediary facilitating banking-as-a-service (BAAS) for various fintechs and their FDIC-insured banking partners. Numerous customers experienced shock and frustration when their accounts were frozen after Synapse’s collapse.
During proceedings in the US Bankruptcy Court, clients expressed harrowing experiences of being unable to access their money for months, resulting in financial hardships. Many reported losing their savings, missing crucial payments, and facing missed medical needs.
Federal Regulators Respond to Complicated Partnership Structures
Synapse, backed by Silicon Valley funding and leveraging a wide network of industry partnerships, began to show signs of instability in October 2023, when it significantly reduced its workforce.
As it entered bankruptcy proceedings in April, banks managing FBO funds for these fintechs held more than $250 million in related accounts, according to a report from the court-appointed bankruptcy trustee. Although the amount has decreased amid ongoing reconciliation challenges, the current estimates of funds still pending resolution are between $65 million and $95 million as of the end of August.