Key Takeaways:
* The FDIC seeks to enforce a new rule compelling banks to keep comprehensive records for fintech app users.
* This move comes after the fallout of tech firm Synapse where thousands of users couldn’t access their accounts.
* The proposal would require banks to maintain records of who own the accounts and their daily balances.
* The rule will be subject to a 60-day comment period if the FDIC board of governors approves it.
* Separately, the FDIC announced a policy around bank mergers to intensify scrutiny on the impacts of bank consolidation.
Upcoming Rule for Fintech App Recordkeeping
The Federal Deposit Insurance Corporation (FDIC) proposed a rule on Tuesday requiring banks to maintain detailed records for customers utilizing fintech apps. This development occurs in the aftermath of tech firm Synapse’s failure, which resulted in thousands of American fintech app users being locked out of their accounts.
The Proposed Rules
The proposed rule targets accounts opened by fintech firms partnering with banks, requiring the bank to keep precise records of the account owner and the daily balances credited to this owner. This stipulation is according to an FDIC memo.
The vulnerability of fintech apps
Fintech apps generally use a system where customers’ funds are merged into a single large account at a bank. This system depends on the fintech or a third party to maintain records of transactions and ownership. Nevertheless, this situation exposes customers to the risk of incomplete or poorly kept records by the nonbank parties. Consequently, it becomes challenging to determine who should receive payouts in the event of a failure. This scenario was the case in the Synapse collapse, which affected over 100,000 users of fintech apps like Juno and Yotta.
Safety Advertisements Misconception
Moreover, the FDIC memo observed that many customers were under the impression their funds would remain secure due to adverts claiming that their funds were FDIC-insured. The issue arose when customers with funds in these “for benefit of” accounts couldn’t access their money since May.
Improving Record Keeping
Improved record-keeping would enable the FDIC to quickly pay depositors if a bank were to fail. This move would satisfy conditions needed for “pass-through insurance,” as FDIC officials explained during a briefing on Tuesday. Although FDIC insurance does not get paid out when a fintech provider like Synapse fails, improved records would aid a bankruptcy court in determining which parties are owed in such events.
Road to Implementation
This rule, if approved by the FDIC board of governors in a vote on Tuesday, will be printed in the Federal Register for public comment over 60 days.
Heightened Scrutiny on Bank Mergers
In addition to this proposed rule, the FDIC released a statement about imposing increased scrutiny around bank mergers. This policy is particularly aimed at consolidation deals that would create banks with over $100 billion in assets, as these have slowed under the current administration.
In Conclusion
Indeed, it’s the consensus among industry analysts that consolidation would create stronger competitors against megabanks like JPMorgan Chase.
Thus, this proposed rule by the FDIC is a giant stride towards ensuring safe and fair practices in the fintech space.