The US Federal Deposit Insurance Corporation (FDIC) is considering plans to protect customers from fintech failures, Bloomberg Law reports.
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The report follows initially Issue The issue, raised by the FDIC and two other federal banking regulators in late July, established specific guidelines requiring all banks under their jurisdiction to monitor and periodically reconcile all accounts they hold or manage, regardless of the source or type Relationship.
The FDIC, Office of the Comptroller of the Currency and the Federal Reserve issued their highly unusual joint statement and request for comment after difficulty reconciling partner bank accounts, resulting in thousands of customers defaulting on third-party account balances running into the hundreds Millions were able to access lasted for more than three months after the bankruptcy of a well-known fintech broker in April.
Clarity and new regulations regarding the reconciliation requirements with third parties will follow shortly
The outcome of federal regulators’ urgent review of fintech banking partnerships is expected later this month with formally proposed new rules reminding FDIC-insured institutions that all accounts and funds held therein are the sole responsibility of the providing banks, funds or transactions involved, regardless of the source of the funds, or any third-party technical or operational arrangements that may exist between such institutions and financial technology companies or service providers.
In fact, the FDIC’s expected action means that every federally insured bank operating in the United States or overseas must comply with the clarified rules, and it is possible that this mandate will have far-reaching implications for future embedded bank fintech financing and “for the benefit of” (FBO) relationships are now in place.
The sweeping tightening of voting and monitoring requirements by a key federal banking regulator may come too late to prevent significant harm to the lives and livelihoods of some victims. Millions of dollars in customer accounts held by up to 100 non-banking online financial services companies, including Dave Inc., Juno, Mercury, Yieldstreet, Yotta and a handful of smaller online companies, were affected by the sudden and high-profile bankruptcy of Synapse Financial Technologies on April 22, 2024.
Synapse’s bankruptcy led to reconciliation issues and frozen funds for thousands of fintech customers
In an article published in Finextra last month, we shared the sad and surprising stories of how customers of ten-year synapse had lost access to their funds when the company failed – they reported having less than $2 million in cash and owing many times that to creditors. More specifically, because Synapse positioned itself as the intermediary banking-as-a-service (BAAS) processor of choice for several fintechs and their FDIC-insured banks, many of these fintechs’ customers were caught off guard when their accounts were frozen after the mid-man Fintech Synapse demise.
During their testimony before the U.S. Bankruptcy Court hearing Synapse’s Chapter 11 reorganization process, some of these fintech end users shared a series of frightening stories about how the inability to control their own money has persisted for months since Synapse had ceased operations, had devastated their lives. Some lost their entire savings, some missed important payment deadlines or important business opportunities, others were unable to pay for medical treatments, and everyone was very unhappy.
Synapse’s tangled web of accounts is prompting an unprecedented combined warning from federal regulators
Synapse, a well-funded, Silicon Valley-backed, San Francisco-based fintech with a network of upstream and downstream partners spread across the country and multiple industries, began showing signs of serious slowdown in October 2023 and laid off one a significant percentage of its former employees.
When the company filed for bankruptcy protection in April of this year, banks that provided custodial space to these fintechs and their customers’ funds, including Evolve Bank and Trust, AMG National Trust, Lineage Bank and American Bank, collectively held more than $250 million -Dollar FBO funds related to these relationships, according to a May 24 court-appointed report Insolvency administrator. The total amount of funds still being held pending what appears to be a difficult-to-conclude arbitration process has been significantly reduced but remains at $65 million to $95 million, according to the trustee’s most recent report released at the end of August.