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of a fintech would have to submit annual reports to the
FDIC which would:

• Describe any material changes to their information
technology systems relevant to compliance with
the rule;
• List the account holders that maintain custodial
deposit accounts with transactional features, the
total balance of those custodial deposit accounts,
and the total number of beneficial owners;

• Set forth the results of the institution's testing of its
recordkeeping requirements; and

• Provide the results of the required independent
validation of any records maintained by third par-
ties.
History has its eyes on you

Embedded banking is coming. Unfortunately, not as
fast as we would like. On Sept. 16, 2024, Five Star Bank
announced plans "…to start winding down its bank-
ing-as-a-service offerings. ... The decision comes after
an internal review that considered the contribution of
banking-as-a-service (BaaS) to the Financial Institu-
tions' core financial results, regulatory expectations
and a proposed rule to reclassify BaaS deposits as bro-
kered."

Regulatory oversight is, at times, necessary. I find it in-
teresting, too, that one of the knocks against the card
networks is the interchange "tax" and rule structure
imposed. Yet those card network rules have long held
that all funds, including reserves funds must be held
by the acquiring bank.

The only exception is for payfacs that are large enough
to obtain a money service business license. Those rules
came about because of a similar instance, back in the
90s, when third-party ISOs were serving merchants
and handling settlement funds. Unfortunately, those
merchants faced the same fate as Synapse's end cus-
tomers. The ensuing regulation is analogous and un-
fortunately, equally necessary.

As founder of Humboldt Merchant Services, co-founder of Eureka
Payments, and a former executive for such payments innovators
as WePay, a division of JPMorgan Chase, Ken Musante has experi-
ence in all aspects of successful ISO building. He currently provides
consulting services and expert witness testimony as founder of Napa
Payments and Consulting, www.napapaymentsandconsulting.
com. Contact him at kenm@napapaymentsandconsulting.com,
707-601-7656 or www.linkedin.com/in/ken-musante-us.

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