Banks will have to closely monitor accounts run by third-party fintechs under a plan in the works by a key federal regulator intended to avoid a repeat of the collapse of Synapse Financial Technologies Inc. that saw millions lose access to their money.
The Federal Deposit Insurance Corp. is expected to issue a proposed rule requiring banks to keep records of accounts “for the benefit of” opened by third-party fintechs so that banks can identify how much end-user money they hold, according to sources. familiar with the subject and who were unable to speak publicly on the upcoming proposal.
Banks could still partner with intermediary companies such as Synapse, but would have to have constant access to third-party ledgers and reconcile data every day under the proposal, the sources said.
The proposal could come as soon as the FDIC board meeting in September, which has not yet been announced.
FDIC Chairman Martin Gruenberg, in a briefing Thursday with reporters, said he did not want to preempt possible regulation, but that the FDIC “may consider regulatory proposals in this regard.”
“The failure of Synapse really illustrated the risks to banks and depositors when banks rely on third parties to make deposits and the need for proper record-keeping so that banks know who the ultimate depositors are ” he said.
Lack of customers
Synapse, backed by Andreessen Horowitz, which filed for Chapter 11 bankruptcy in April, has partnered with around 100 fintechs serving more than 10 million customers. The now defunct company operated as a banking as a service provider, serving as an intermediary for banks and fintechs, including opening FBO accounts in banks for fintech partners.
Synapse has partnered with other fintechs such as Juno, Mercury, Yotta and Dave Inc., including those serving gig workers and crypto investors and providing gamified banking services.
After Synapse’s bankruptcy, it became apparent that there were discrepancies between the records Synapse held on customer accounts and those held by its banking partners, such as Evolve Bank & Trust, based in West Memphis, Ark.
As a result of these discrepancies, millions of fintech customers were unable to withdraw their money from partner banks, leading to significant hardship, according to documents filed in Synapse’s bankruptcy proceedings.
Evolve and three other Synapse partner banks still hold more than $60 million in unreconciled funds from fintech clients, according to an Aug. 29 report. status report filed by former FDIC Chairwoman Jelena McWilliams, Synapse’s bankruptcy trustee.
Overall, there is an estimated gap of between $65 million and $95 million between the money held by Synapse’s partner banks and the amount owed to fintech end users, according to the report. Banks and others are trying to determine where the deficit is coming from.
The Federal Reserve in June issued an order requiring Evolve to obtain approval from regulators before entering into future fintech partnerships.
Regulatory gaps
The FDIC’s proposal aims to prevent future calamities following Synapse’s failure. A bank that maintains the FBO ledger or performs daily reconciliation of a third-party ledger would know how much each end user is owed.
Such real-time reconciliation would also help the FDIC if it were to intervene if a partner bank failed. All Synapse partner banks are currently solvent.
Regulators, including the FDIC and Fed, have been criticized for failing to step in to help fintech customers. But third-party BaaS providers are not subject to direct supervision or regulation, and the FDIC could only intervene if partner banks fail.