US Regulators Propose New Rules for Banks Collaborating with Fintechs

In recent months, the relationship between banks and fintech companies has come under intense scrutiny, particularly following the collapse of Synapse Financial Technologies. This incident, which occurred earlier this year, resulted in the freezing of thousands of customer accounts, raising significant concerns about the security and management of funds held by fintechs on behalf of their clients. In response to these challenges, a top U.S. banking regulator has proposed new rules aimed at strengthening recordkeeping requirements for banks that collaborate with fintech firms.

The Federal Deposit Insurance Corporation (FDIC) has outlined that these new requirements are essential to ensure consumers have timely access to their funds, even if a bank does not fail. The FDIC's proposal mandates that banks identify the beneficial owners of each account and maintain accurate records of account balances. This is a crucial step in protecting consumers, especially in light of the recent bankruptcy of Synapse, which left many customers in a precarious situation.

Synapse's bankruptcy, filed in April, has raised alarms about the potential risks associated with third-party financial intermediaries. The company’s collapse led to the freezing of accounts for customers of its partner banks, including Evolve Bank & Trust, which had been offering banking services through fintech collaborations. Although the exact number of affected individuals remains unclear, estimates suggest that tens of thousands may have been impacted. A court-appointed trustee has indicated a significant shortfall of $85 million between what Synapse's partner banks owe depositors and the actual funds available.

In addition to the recordkeeping proposal, the FDIC has also finalized updated guidance on bank mergers. This new policy will subject mergers resulting in a combined bank with over $100 billion in assets to heightened scrutiny. This marks the first update to the agency's merger guidance in 16 years, reflecting a growing concern over the stability of the banking sector. The recent failures of several large U.S. banks have prompted regulators to take a closer look at industry consolidation, which has resulted in significant losses for the FDIC's insurance fund.

Moreover, the U.S. Justice Department has announced its decision to withdraw from the 1995 bank-specific merger guidelines, opting instead for broader merger guidelines that were finalized last year. This shift indicates a more rigorous approach to regulating mergers across all industries, including banking, under the current administration.

As these regulatory changes unfold, it is clear that the landscape of banking and fintech partnerships is evolving. The proposed rules aim to enhance consumer protection and ensure that banks maintain a high level of accountability when working with fintech companies. For consumers, this means a greater assurance that their funds are secure and accessible, even in challenging circumstances. As the financial sector continues to adapt to new technologies and partnerships, it is crucial for both regulators and financial institutions to prioritize transparency and consumer trust.