As banks link with FinTechs, as new financial services are forged, with consumer-facing apps and digital channels in the mix, there’s still a need for robust record-keeping and reconciliation.
Regulators are busy forging new rules that would ensure better recognition and tracking of where customers’ funds are being held, along with how and when they can access those funds.
The complexity of the bank/FinTech relationships has been underscored by the recent push out of a commentary period tied to proposed rules on ledgers, data standardization and better transparency on accounts.
As reported, the Federal Deposit Insurance Corporation (FDIC) extended the commentary period for its proposed rule by 45 days — the deadline had been Monday (Dec. 2) and now is Jan. 16, 2025.
In the rule, which was published in the Federal Register, the FDIC wrote that “ the evolution of banking and financial services has increasingly included non-bank fintech companies offering consumers new options and alternatives for accessing banking products and services,” but noted that the joint efforts “also increasingly rely on third parties that, depending on the context, might be referred to as, for example, ‘processors,’ ‘ middleware providers,’ or ‘program managers,’ to perform a range of critical functions.” The activities include accepting deposits and keeping transaction records.
PYMNTS reported in September that the rule has been designed to bolster recordkeeping for bank deposits received from third-party, non-bank companies that accept those same deposits on behalf of consumers and businesses. At a high level, 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 on a daily basis.
The FDIC has stated that the proposed rule was set in motion by the bankruptcy of Synapse, as that firm’s middleware linked banks and FinTechs. The customer funds were in turn held in custodial deposit accounts at the banks. Those deposit accounts tend to hold the funds of several (in many cases thousands) of end users.
The complexities become apparent when, as the FDIC noted, nonbank companies deposit their customers’ funds in a bank in those custodial accounts, “and the bank may not know the individual owners of funds in the custodial account.” 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 proposed rule would require FDIC-insured banks holding certain custodial accounts to maintain accurate account records so that the individual owner of the funds can be identified, including a requirement to reconcile the account for each individual owner on a daily basis.
In reading through some of the commentary letters posted to date, Paxos said in its own letter to the FDIC late last week that “Paxos serves as the issuer and custodian of PayPal’s PYUSD stablecoin. Reserves backing PYUSD are meticulously managed within omnibus accounts designated exclusively for PYUSD holders. This structure guarantees that, even in the unlikely event of Paxos’ failure, there is no question about the recordkeeping or the ability to identify and return reserve assets to stablecoin holders.”
By imposing federal requirements on state-regulated trust companies, the firm maintained that “mandating such granular tracking would impose significant operational burdens on Paxos and our banking partners, undermining the efficiency of our reserve management practices without providing any tangible benefit to customers. Worse, these burdens risk creating systemic deficiencies that could hinder the broader adoption of innovative financial instruments such as stablecoins.”
Separately, reached by PYMNTS regarding the proposed rule and the commentary period, Pathward declined to comment.
And in an October comment to the FDIC, the Bank Policy Institute and seven other financial services industry organizations noted that they are in the midst of responding to a separate RFI on bank/FinTech relationships, adding that “as a matter of good governance, the FDIC should collect and consider the requested input on bank and FinTech arrangements before proposing new custodial recordkeeping requirements that address these same arrangements.”
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