Proposed Rule to Protect Fintech Users after Synapse Failure
The Federal Deposit Insurance Corporation (FDIC) has put forth a new rule aimed at safeguarding customers of fintech apps following the collapse of tech firm Synapse. This failure left thousands of Americans unable to access their accounts. The proposed rule would require banks to maintain detailed records for customers of fintech firms that partner with them. The records would include information about the account owners and the daily balances associated with each account.
Fintech apps often rely on the practice of pooling customers’ funds into a single account at a bank. However, the responsibility of maintaining accurate transaction and ownership records for these accounts falls on either the fintech company or a third party. This exposes customers to the risk of incomplete or unreliable records, making it difficult to determine who should be paid in the event of a failure. This was precisely the case in the Synapse collapse, which affected over 100,000 users of fintech apps such as Yotta and Juno. Since May, customers with funds in these accounts have been unable to access their money.
The FDIC recognizes that many customers were under the impression that their funds were FDIC-insured due to representations made about the placement of their funds in FDIC-member banks. To address this issue, the proposed rule would require banks to maintain better records. By doing so, the FDIC would be able to expedite the payment of depositors in the event of a bank failure. These enhanced records would also assist a bankruptcy court in determining the amount owed to each depositor.
It is important to note that FDIC insurance does not cover losses in the event of a fintech provider’s failure, as demonstrated by the Synapse situation. However, the improved records would still be valuable in the event of a bankruptcy proceeding. The proposed rule is currently pending approval by the FDIC board of governors. If approved, it will be published in the Federal Register for a 60-day comment period.
In addition to the proposed rule, the FDIC has also released a statement regarding its policy on bank mergers. The statement emphasizes the need for heightened scrutiny when considering mergers, particularly those that would result in banks with assets exceeding $100 billion. This move comes as bank mergers have slowed under the Biden administration, drawing criticism from industry analysts. These analysts argue that consolidation would foster stronger competition against megabanks like JPMorgan Chase.
By implementing these new rules and policies, the FDIC aims to protect consumers and promote stability within the fintech and banking sectors. The proposed rule on maintaining detailed records for fintech app users would provide greater transparency and accountability, ensuring that customers’ funds are secure and accessible. Similarly, the heightened scrutiny of bank mergers seeks to strike a balance between promoting competition and maintaining a healthy banking landscape.
