FDIC Proposes Rules Overhaul for Bank-Fintech Partnerships
The Federal Deposit Insurance Corporation (FDIC), a key US banking regulator, has proposed new rules for banks working with fintech companies.
The proposal aims to strengthen recordkeeping requirements for accounts held by fintechs on behalf of their customers, a move that could significantly impact the growing Banking-as-a-Service (BaaS) sector.
Under the new rules, banks partnering with fintech firms would need to identify the beneficial owners of each account and its balance.
Beneficial ownership refers to the individual or entity that ultimately controls or benefits from an account, a concept crucial for preventing financial crimes and ensuring transparency.
FDIC proposal comes after Synapse collapse
The proposal comes in the wake of Synapse Financial Technologies' bankruptcy earlier this year.
Synapse, a BaaS provider that acts as an intermediary between banks and fintech companies, filed for bankruptcy in April, resulting in the freezing of thousands of customer accounts.
FDIC Chairman Martin Gruenberg says: “These new requirements would ensure consumers have timely access to their funds, even if a bank fails. We've seen how the collapse of a single fintech partner can disrupt the entire ecosystem, and we're taking steps to mitigate such risks.”
The proposed rules would allow third parties like Synapse to maintain records, provided certain conditions are met. These include ensuring banks retain unrestricted access to customer data even in the event of a middleman's bankruptcy or insolvency.
The Synapse bankruptcy has highlighted vulnerabilities in the current system. While the exact number of affected accounts remains unclear, regulators estimate it could be as high as tens of thousands.
A court-appointed trustee in the bankruptcy case claimed in June that there is an £85m (US$112m) shortfall between Synapse's partner banks and what depositors are owed.
Bank merger guidelines updated
In a separate but related move, the FDIC has finalised updated bank merger guidance. The new policy will bring increased scrutiny to mergers resulting in a combined bank with assets exceeding US$100bn.
This update marks the first change to the agency's merger guidance in 16 years. The revised rules place special emphasis on maintaining the stability of the banking sector, a concern that has gained prominence following recent bank failures.
“Our updated approach to bank mergers reflects the evolving financial landscape and the need for robust competition in the industry,” says FDIC board member Jonathan McKernan. “We're particularly focused on how these mergers might impact systemic risk and consumer access to banking services.”
Department of Justice shifts approach
Simultaneously, the US Department of Justice (DOJ) announced its withdrawal from the 1995 bank-specific merger guidelines. Instead, the DOJ will now apply its broader merger guidelines, finalised in late 2023, to the banking sector.
This shift signifies a move towards a more holistic approach to evaluating mergers across all industries, including banking. The new guidelines consider factors such as labour market effects and potential for innovation, in addition to traditional antitrust concerns.
Assistant Attorney General Jonathan Kanter explains: “By applying our updated merger guidelines to the banking sector, we're ensuring a consistent and comprehensive approach to maintaining competition across all industries.”
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