Several watchdogs and agencies are sharpening their gaze on FinTechs, specifically bank-FinTech relationships and the risks tied to those partnerships.
In July, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) issued a request for information on those partnerships and a statement that discussed the risks.
“The statement details the potential risks and provides examples of effective risk management practices for these arrangements,” the agencies said in a press release at the time. “In addition, the statement reminds banks of relevant existing legal requirements, guidance and related resources, and provides insights that the agencies have gained through their supervision.”
Although three agencies were involved in the July action, it may be the FDIC that winds up fundamentally altering the nature of the bank-FinTech interactions, certainly when it comes to how those pacts are forged and how they operate day to day. The Synapse bankruptcy helped set that closer examination in motion.
The FDIC does not regulate FinTechs directly, but it oversees banks, so it has a hand in directing how traditional financial institutions work with digital innovators. It also has the ability to monitor FinTechs and has begun more closely tracking FinTechs that partner with banks, aiming to spot potential problems before they affect banks and track FinTechs as they switch banking partners.
Beyond monitoring, actions on the part of the FDIC, including proposed rules, give insight into key regulatory themes. As the expanded list of actions that would be required of the banks indicates, banks will more closely vet those partnerships.
1. Record Keeping
An extension of a commentary period that would implement new rules on ledgers and data standardization sheds light on the complexity of the relationships. The commentary period will now last until the middle of January, where it had been set to end last week.
The proposal requires FDIC-insured banks holding certain custodial accounts to ensure accurate records are kept determining the individual owner of the funds and to reconcile the account for each individual owner daily. Since the FDIC only insures deposits of insured depository institutions, the agency’s deposit insurance coverage “does not provide consumers and businesses with general protection against the default, insolvency or bankruptcy of any nonbank entities,” the FDIC said.
2. Compliance
The FDIC would require banks to complete an annual validation of third parties through an independent party. As detailed in the proposal, FDIC-insured banks would be required to certify those results, including “any material changes to their information technology systems relevant to compliance with the rule” and “the account holders that maintain custodial deposit accounts with transactional features, the total balance of those custodial deposit accounts, and the total number of beneficial owners.”
3. Insurance
“In recent years, the FDIC has observed an increasing number of instances where financial service providers … have engaged in false advertising or made misrepresentations about FDIC insurance coverage on the internet,” the FDIC said in the proposed rules.
Companies in relationships with FDIC-insured banks have “made false statements on the companies’ websites stating or suggesting that the companies are FDIC-insured and/or that their uninsured financial products are insured by the FDIC,” the FDIC said. “In other instances, companies have misused the FDIC logo or failed to identify [a bank] with which they have a relationship. These types of misrepresentations and omissions would be false and misleading and have potential to harm consumers.”
Beyond the advertising aspect of FDIC insurance, there may be a debate (re)opened surrounding deposit insurance itself. The FDIC only insures deposits of the banks themselves, and insurance (up to $250,000 per account) is paid out only in the event of a bank failure.
The current structure does not provide customers with protection “against the default, insolvency or bankruptcy of any nonbank entities with which [banks] might do business, even if a nonbank entity has a relationship with, or deposits funds” with those insured depository institutions, the FDIC said.
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