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Insights and Expertise

FDIC proposed If finalized, the rule would substantially alter the over-

recordkeeping for sight, recordkeeping and reconciliation required by banks
partnering with fintechs. I have previously discussed the
importance of partner pairing, but these new rules am-
custodial accounts plify that importance (see https://bit.ly/40nXr0x). The rule
would apply to any bank that maintains a deposit account
with a FinTech and not just large banks.
The room where it happens

The proposed rule does not apply to FBO or For the Ben-
efit Of accounts. These accounts already require sufficient
recordkeeping; no change is expected. FBO accounts are
where payfacs, ISVs and ISOs maintain their settlement
and merchant reserves.

But for entities seeking to enable embedded banking, this
will alter the roadmap. Although the rule requires the
bank to reconcile and identify each end user's deposit, that
work may be done by a fintech, but in that context, addi-
tional rules would apply.

The additional rules would require contractual require-
ments clearly defining roles and responsibilities. I would
By Ken Musante expect that the final rule would also require some type of
Napa Payments and Consulting escrow database which would allow the bank to take over
in the event the fintech became incapacitated. I expect
quarter of a century ago, I graduated from prescriptions for vetting, controls, oversight and audits to
Pacific Coast Bankers School, a three-year cre- be built out as well.
dential program housed on the campus of the
A University of Washington. My banking back- Just you wait
ground has served me well within payments and allowed As mentioned, most ISOs, ISVs and payfacs would not be
me to successfully navigate both traditional banking and affected if they are only working with a bank for payment
the innovative payments space. I long for embedded bank- processing and maintain merchant monies in an FBO ac-
ing when BaaS is commonplace. Like most uncharted ter- count. Payfacs that have their own money transmitter li-
rain, it will be difficult trekking. cense and fintechs offering embedded banking through a
bank will be impacted.
We have all seen the headlines regarding the Synapse
bankruptcy (see https://bit.ly/3Yq4R0D). Synapse provid- The proposed rule is an extension of recent attempts to
ed APIs for other fintechs to integrate with to provide a better regulate the controls banks have over third parties.
customer-facing platform. Synapse had relationships with Regulators saw the ease and, in some cases, consequences
various FDIC-insured institutions and fintechs, but upon from the offerings of non-FDIC insured entities through
Synapse's bankruptcy, the banks could not access the in- regulated banks and sought to prescribe specifics under
formation needed to confirm the deposits of the end cus- which deposit accounts may be offered.
tomers. Worse, there is a $65+ million shortfall.

Figure it out, Alexander Further, many of the partner banks were smaller, and this
proposal is specifically meant to apply to all banks, re-
Customers were outraged. Some wrongly presumed their gardless of size. A bank maintaining accounts on behalf
account was FDIC insured. The FDIC made all SVB and
First Republic customers whole, surely they should do the
same here.
The proposed rule is an extension
Instead, as a consolation, the FDIC is working to permit of recent attempts to better
future shortfalls by proposing requirements that would
strengthen the recordkeeping and reconciliation require- regulate the controls banks have
ments for custodial accounts so that beneficial owners (or
end-customers) could be extended FDIC protection (see over third parties.
https://bit.ly/3YIJoBB).

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