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The Federal Deposit Insurance Corp. on Tuesday proposed new rules that would require banks to keep detailed records on fintech app customers, after the collapse of tech company Synapse left thousands of Americans locked out of their accounts.
According to the FDIC memo, the rule would apply to accounts opened by fintech companies that partner with banks and would require financial institutions to keep records of account owners and their attributable daily balances.
Fintech apps often rely on the practice of pooling many customers’ funds into one big account at a bank, relying on the fintech or a third party to manage the ledger of transactions and ownership.
This situation exposes customers to the risk that the non-banks involved will keep sloppy or incomplete records, making it difficult to determine who should be paid in the event of a collapse. That’s what happened with the collapse of Synapse, which affected more than 100,000 users of fintech apps including Yotta and Juno. Customers with funds in these “beneficiary” accounts have been unable to access their funds since May.
“In many cases, the funds were advertised as being insured by the FDIC, and consumers may have believed that their funds would remain safe and accessible due to representations made about depositing their funds in an FDIC-member bank,” the agency said in the memo.
Better record-keeping would meet a requirement for “pass-through insurance,” allowing the FDIC to make quicker payments to depositors in the event of a bank’s failure, FDIC officials said at a news conference Tuesday.
While FDIC insurance won’t pay out if a fintech provider goes bankrupt, as was the case with Synapse, the enhanced records will help bankruptcy courts determine who is owed how much, the official added.
If approved by the FDIC Board in its vote Tuesday, the rule would be published in the Federal Register and subject to a 60-day comment period.
Separately, the FDIC also issued a statement on its policy regarding bank mergers, saying it would step up scrutiny of the effects of consolidation, particularly for transactions that would create banks with more than $100 billion in assets.
Bank mergers have slowed under the Biden administration, with industry analysts criticizing them for creating stronger competitors such as megabanks. JPMorgan Chase.