FDIC Plans To Revise Reconciliation Standards Following Synapse Incident
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The US Federal Deposit Insurance Corporation (FDIC) is exploring strategies to shield customers from fintech failures, according to Bloomberg Law. This move comes after the FDIC, along with two other federal banking regulators, voiced concerns in late July.
FDIC issued new directives mandating that all banks under their supervision must be monitored. They will consistently reconcile all accounts they manage, regardless of the account’s origin or the nature of the relationship.
FDIC Seeks To Improve Bank-Fintech Relationship Management
The FDIC, Federal Reserve, and Office of the Comptroller of the Currency issued an uncommon joint statement. They also called for feedback after enduring prolonged difficulties with reconciling partner bank accounts.
This issue, which left thousands of clients unable to access hundreds of millions in third-party account balances, continued for over three months after the bankruptcy of a major fintech intermediary in April.
Federal regulators are expected to announce new rules later this month in response to their urgent review of fintech-banking partnerships. These proposed rules will remind FDIC-insured institutions that they are solely responsible for any accounts and funds they manage.
This responsibility holds regardless of the source of the funds, the nature of the transactions, or any technical or operational agreements with service providers or fintech companies.
Essentially, the FDIC’s anticipated action means that any federally insured bank operating in the United States or its territories will need to follow these clarified rules. This requirement could significantly impact existing bank-fintech embedded finance arrangements and “for benefit of” (FBO) relationships.
The Federal Banking Regulator’s Increased Reconciliation And Monitoring Requirements
The increased reconciliation and monitoring requirements from a major federal banking regulator might come too late to avert significant harm to some individuals and their financial well-being.
The sudden and widely publicized bankruptcy of Synapse Financial Technologies on April 22, 2024, impacted millions of dollars in customer accounts. These accounts were held by up to 100 online, nonbank financial service providers. This includes companies like Yotta, Yieldstreet, Mercury, Juno, Dave Inc., and several smaller online firms.
Synapse, a well-funded fintech based in San Francisco and supported by Silicon Valley investors, began showing significant signs of trouble in October 2023. At that time, the company, having a complex network of partners across various sectors and locations, laid off a large portion of its workforce.
When the firm filed for bankruptcy in April, banks managing deposits for these fintechs and their clients such as American Bank, Lineage Bank, and AMG National Trust held over $250 million in FBO funds.
