Samantha: Hello, this is Samantha Shares.
This episode covers the Statement of C F P B Director Rohit Chopra,
Member, F D I C Board of Directors, on Stopping Fintech Deposit Meltdowns
The following is an audio version of that statement.
This podcast is educational and is not legal advice.
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And now the statement.
Statement of C F P B Director Rohit Chopra, Member, F D I C
Board of Directors, on Stopping Fintech Deposit Meltdowns
Over the past decade, we have seen a significant incursion
into consumer deposit taking and payments activities by companies
that arenât banks or credit unions.
These firms want the public benefits of being a bank or credit union,
without the public obligations.
This trend poses significant risks.
We have developed a legal framework for banks over the past century designed to
ensure peopleâs deposits are safe and that they have constant access to their funds.
Deposit insurance and the special F D I C resolution process protect
people if the bank fails and they retain quick access to their cash.
When nonbanks engage in deposit taking, whether directly or in partnership with a
bank, all these protections may not apply.
Today, the F D I C Board of Directors is proposing a rule that
would strengthen requirements for banks that partner with nonbanks
in offering deposit-style products.
This year, Synapse, a middleman between nonbanks offering deposit-style
products to end users and their partner banks, filed for bankruptcy.
The firm appears to have failed to properly track customer
account balances and may have engaged in other shady practices.
As a result, tens of thousands of customers have had their
funds frozen for months.
The banks have been unable to reconcile all the records necessary
to get end users their funds back.
This has led to severe harm, especially for people who were
using the nonbank account as a primary checking or savings account.
If one of the bank partners had failed, instead of Synapse, the horrible
account balance tracking may have prevented the F D I C from making quick
deposit insurance determinations and returning funds promptly to end users.
When consumers do not have access to their funds, it can undermine confidence
in the financial system and ruin lives.
The proposed rule would require banks to maintain records identifying the
ultimate end users, their balances, and other information for custodial
accounts with transaction-style features.
Banks would still be permitted to maintain these records through
a third party as long as certain protections are in place, including
daily reconciliations to make sure the numbers at the customer-level add up.
Banks would also have to maintain constant access to the records,
including in the event of the nonbankâs bankruptcy or other disruption.
This framework would expedite an F D I C insurance determination if the
bank fails and prevent the type of chaos weâre seeing with the Synapse
bankruptcy if the nonbank fails.
To be clear, this rule would not address all the risks posed
by banking with a nonbank.
Even if all the records are appropriately maintained, there still may be some delay
in getting end users their money back as the nonbankâs bankruptcy proceeding plays
out.1 In addition, nonbank deposit taking offered directly without a bank partner
is generally outside the jurisdiction of the federal banking agencies.2 If the
firm fails, consumers become unsecured creditors of the nonbankâs bankruptcy
estate and may lose their funds.
This proposal must not be the end of our collective work on this issue.
First, disclosure requirements related to the intricacies of pass-through deposit
insurance are woefully inadequate.
Consumers should, at the very least, be told clearly and concisely that
they could face delays or lose their money by banking with a nonbank.
Second, we must continue to take enforcement actions against nonbanks
that make misrepresentations about deposit insurance or
misuse the F D I C name or logo.
Finally, for nonbanks like Venmo, PayPal, and Cash App, that offer
deposit-style products directly, state and federal policymakers should consider
requiring these firms to promptly sweep peopleâs balances to their
linked insured account automatically.
Under their state licenses, these nonbank firms are supposed to be in
the money movement business, not the banking business of keeping deposits.
This concludes the C F P B Directorsâ statement.
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This is Samantha Shares and we Thank you for listening.