‘For Benefit of’ Accounts Loom as Hot-Button Issue for Regulators, FinTechs and Banks

The ties that bind banks and FinTechs will be more closely watched by the Federal Deposit Insurance Corporation (FDIC), and a formal proposal/rule from the regulatory agency, governing accounts in banking-as-a-service relationships, may come sooner rather than later.

As reported this week by news outlets including Bloomberg, the focus will be on “for benefit of accounts” that are typically set up as pooled accounts that allow FinTech companies to manage funds on behalf of their users. In the meantime, the FinTechs do not wind up assuming legal ownership of the account.

The banks linking with the FinTechs are likely to be mandated to set up ledgers to more accurately track where the money is, and how much end-customer funds are on the books. And in doing so — in a bid to avoid the pitfalls and shocks of the Synapse collapse this year, where customers were locked — the banks will access that third-party ledger and reconcile data on a daily basis.

FDIC Readying for Regulation?

In a press briefing accompanying the FDIC’s latest deep dive into the second-quarter banking industry performance, FDIC Chairman Martin Gruenberg noted on Thursday (Sept. 5) that though he was not in a position to comment on any specific proposals, “the Synapse failure really illustrated the risks to banks and depositors when banks rely on third parties to be the conduit for deposits and the need for adequate record-keeping so that the banks know who the ultimate depositors are … and who is actually covered by deposit insurance is really a very important issue.”

He stressed that the record keeping and the issue of deposit insurance remain “matters of attention for the FDIC and we may consider regulatory proposals in this regard.”

In PYMNTS’ own coverage of the construct of FBO, we noted that “because they enable FinTech companies to manage customer funds while adhering to legal requirements, FBO accounts are fundamental to the operational integrity, regulatory compliance and customer trust that underpins the FinTech industry.”

We note that the accounts are governed by insurance deposit limits – but in the event that a bank fails, the lack of information surrounding the accounts, and specifically the FBO accounts means that’s tough to discern what’s owed to which account holder.

The FDIC’s shot across the bow, per Gruenberg’s words, comes at a time when, banks’ and FinTechs’ intertwining are gaining all manner of attention.

In July, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the FDIC issued a Request for Information on bank-FinTech arrangements that are used to extend banking products and services distributed to consumers and businesses. The commentary period is ongoing, extending to the end of the month. And in a letter to the agencies from banking trade groups including the Bank Policy Institute and the Financial Technology Council as part of the commentary period, the stakeholders asked for an extension.

“The 60-day comment period is an inadequate amount of time to submit a fulsome response that catalogues the range of bank-fintech structures, as well as the risks and risk mitigation techniques associated with them,” they said in the letter. “We therefore request that the agencies extend the comment deadline by 30 days … The financial system is at a pivotal time in its evolution, and it would not be prudent to rush the RFI process unnecessarily.”