Wednesday, August 28, 2024
Separately, each agency issued a request for information, seeking public and industry input on potential risks associated with bank-fintech collaborations on banking services. Comments are due by Sept. 30, 2024, although that deadline could be extended. The American Bankers Association has already submitted a letter asserting more time is needed to sufficiently comment on the request.
The regulators' joint statement sets forth a litany of risk and risk management examples that arise from bank-fintech partnerships but makes clear there are as yet no new regulatory requirements or supervisory expectations.
"Banks are neither prohibited nor discouraged from providing banking services to customers of any specific type, as permitted by law or regulation," the statement asserts. It adds, however, that "A bank's use of third parties to perform certain activities does not diminish its responsibility to comply with all applicable laws and regulations."
The agencies continued, stating, "Similar structures have been utilized for certain activities in the banking industry for many years, such as activities related to prepaid card programs. However, the agencies have observed an evolution and expansion of these arrangements to include more complex arrangements that involve the reliance on third parties to deliver deposit products and services."
The statement lists numerous operational and compliance concerns regulators have with these bank-fintech arrangements, such as the potential for a lack of bank management controls, the lack of access to records, failure to properly perform compliance functions, and insufficient risk management to meet consumer protection obligations.
The regulatory tome and request for information comes on the heels of the collapse of banking as a service provider Synapse Financial Technologies, which left more than 100,000 Americans locked out of deposit accounts containing an estimated $265 million, according to published reports.
Synapse was part of a new breed of fintechs serving as middlemen between banking apps and brick-and-mortar institutions. Most of the affected consumers (about 85,000) used a banking app called Yotta that gamified personal finance, the app's co-founder Adam Moelis explained during a June interview with CNBC.
The deposit crisis ensued from a dispute between Synapse and Tennessee-based Evolve Bank & Trust over just how much of Yotta's funds are held at Evolve and how much other partner banks hold.
As the bank regulators noted in their request for information, "fintech companies often play a critical role in maintaining deposit and transaction system of record. These transaction records may not be reflected in the bank's core processing system. Instead, the bank's core deposit ledger may only include omnibus accounts, often titled to reflect that they are held for the benefit of end users."
A group of U.S. senators, led by Senator Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee, sent a letter to Synapse's owners and its bank partners in early July urging them to "collectively pool the necessary resources to immediately make available all customer deposits currently frozen by the Synapse bankruptcy." But as of yet that has not yet happened.
The online magazine Tech Crunch, in an Aug. 22 article said "the debacle has left observers questioning the banking-as-a-service concept and digital banking as a whole." 
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