Statement on Proposed Requirements for Custodial Deposit Accounts

This past year, the collapse of Synapse triggered a fallout with their FDIC Insured banking partner, Evolve Bank & Trust and many other fintechs including Juno, Yotta and Yieldstreet. They and their customers are paying the price. Following the bankruptcy, Synapse’s banking partners encountered significant difficulties in obtaining, reviewing, and reconciling Synapse’s records and have raised concerns about the accuracy of the records, which has affected the ability of consumers to access funds placed. This has and will result in real, significant and ongoing harm to those consumers.

This is simply unacceptable behavior. Offloading fiduciary responsibility by relying on other parties to provide the source of truth on account activity is not only irresponsible but maintaining compliance within a double ledger system is error-prone and expensive. The actions of irresponsible banks hurt consumers, business, the industry and our standing with the regulators.

In the past, we’ve been the first to push back on regulator overreach. But on this occasion, regulators at the FDIC are undeniably right to take responsive action. Many of us already have the proposed systems in place and operate with a crystal-clear understanding that regulatory safety and soundness is the responsibility of the partner bank in the bank-fintech relationship. However, given recent history and behaviors of others, the proposed rule around Requirements for Custodial Accounts is an absolute, yet reasonable and balanced response, necessary to protect both consumers and the future of the bank-fintech model.

Clearly, there are some bad actors operating in the industry, poisoning the well and undermining the rest of the industry’s relentless efforts to uphold a stringent commitment to compliance, safety and soundness. These parties must be held accountable and the gaps which allowed these actions should be addressed through regulation. Even more importantly, the handful of bad actors should not create any inference of systematic compliance issues in the bank-fintech model, resulting in a global, draconian and constraining regulatory enforcement. This would have a chilling effect on financial services innovation, depriving the economy, consumers and small businesses of the many and valuable services that have come from these partnerships.

Responsible banks and their fintech partners welcome the FDIC’s efforts. Clear and reasonable guidelines for bank partners encourage innovation and build trust in the model by mitigating risk, enhancing operational efficiency, encouraging market stability and most important of all, strengthening consumer protection. In recognition of this, fintechs should partner exclusively with banks working to achieve the gold standard of regulatory compliance and should also take on the responsibility of meeting high compliance standards themselves. To do otherwise would be taking on significant risk for their customers and themselves.

More specifically, no bank should enter a relationship with a fintech without complete control over all activity, including maintaining its own ledger. It’s worth the in-house technological investment. A collaborative model built foremost on compliance, fosters innovation and expands access to financial services for millions of consumers, especially to those excluded from traditional banking systems.

The FDIC is right to hold bad actors accountable and require we all rise to the occasion.