New FDIC Rule Aims to Protect Fintech Customers

The Federal Deposit Insurance Corporation (FDIC) has proposed a new rule that would require banks to keep detailed records for customers of fintech apps. This rule comes in response to the recent failure of Synapse, a fintech company that resulted in thousands of Americans being locked out of their accounts.

The rule targets accounts opened by fintech firms that partner with banks.

It would require the bank to maintain records of who owns the account and the daily balances attributed to the owner.

This new regulation is expected to provide greater transparency and accountability in the relationship between banks and fintech companies.

Fintechs and the Pooling of Funds

Many fintech apps utilize a system where customer funds are pooled into a single large account at a bank. The fintech firm or a third party is responsible for maintaining records of transactions and ownership.

This practice creates risks for customers, as the fintech company or third party may not keep accurate or complete records.

In the event of a failure, this can make it difficult to determine who is owed what and complicates the process of paying out funds.

Synapse Failure: A Catalyst for Change

The collapse of Synapse, a fintech company that partnered with multiple banks, exposed the vulnerabilities of this system. Over 100,000 users of fintech apps, including Yotta and Juno, were unable to access their money for months.

Synapse's failure highlighted the need for better recordkeeping and oversight within the fintech industry.

The FDIC's new rule is intended to address these concerns and protect consumers from similar situations in the future.

Importance of Recordkeeping

The FDIC believes that improved recordkeeping will be crucial in facilitating timely payouts to depositors in the event of a bank failure. This is particularly important for "pass-through insurance," which covers deposits held in accounts opened by fintech firms.

The new rule would require banks to maintain detailed records of individual customer balances, ensuring the FDIC can quickly identify and verify deposits for insurance purposes.

This will help ensure that depositors receive the insurance coverage they are entitled to, even in cases where the fintech provider fails.

FDIC's Role in Protecting Customers

The FDIC's primary mission is to protect depositors and maintain the stability of the financial system. The new rule is a reflection of the agency's commitment to safeguarding customers and promoting transparency within the banking industry.

While the FDIC does not insure deposits held directly with fintech companies, the new rule will help protect customers from losses in cases where a bank partner fails.

The FDIC's actions highlight the agency's proactive approach to addressing emerging risks in the financial system.

Bank Mergers Under Scrutiny

In addition to the new rule on fintech accounts, the FDIC also released a statement on its policy regarding bank mergers. The agency will increase scrutiny of consolidation in the banking industry, particularly for deals involving banks with assets exceeding $100 billion.

The FDIC's heightened scrutiny aims to ensure that bank mergers do not lead to excessive market concentration and harm competition.