FDIC’s Bold Proposal – Safeguarding Fintech Users and Addressing the Fragile Banking Partnership

The Federal Deposit Insurance Corporation’s current proposal doesn’t land softly— it thuds like a wake-up call. Banks partnering with fintech firms have been given notice, a clear signal that the world of finance, with all its gloss and glamour, is still fragile. The collapse of Synapse— where over 100,000 people suddenly found their money trapped— was a cold slap of reality… a reminder that innovation can sometimes be one step ahead of caution.

FDIC unveils rule forcing banks to keep fintech customer data in aftermath of Synapse debacle: The rule, aimed at accounts opened by fintech firms that partner with banks, makes the institution maintain records of who owns the account and daily balances. https://t.co/klLaVAZr4o pic.twitter.com/zE2rHLcs0Q

— TradeFlo (@TradeFlo) September 17, 2024

Fintech apps, with their promises of sleek efficiency, have drawn a great volume of users to their platforms. Who wouldn’t be drawn to the convenience? A few taps, a swipe, and your finances are at your fingertips. But under that polished surface… a deeper risk always lurks. Most users don’t realize that their funds often sit, not in individual accounts, but lumped together in one sprawling pot at a partnering bank. The fintech provider, or some other shadowy third party, is left to sort out who owns what— until something goes wrong. And it’s when things fall apart that the cracks show… wide open.

Synapse’s collapse didn’t just inconvenience people. It stranded them. Thousands were left dangling, unable to access their hard-earned money. One moment, security—then suddenly, the rug is pulled out from under them. A breakdown like this exposes the fragility in a system where fintech and banks dance together but don’t always synchronize their steps.

The months of financial limbo for customers of apps like Yotta and Juno have been nothing short of a nightmare. Money wasn’t just hard to reach—it was locked behind invisible doors. The fintech-banking marriage wasn’t built on firm ground, and the collapse of Synapse showed just how wobbly that foundation could be. Poor record-keeping, confusing ownership, and a foggy sense of responsibility… left in the hands of people and companies who were quite unprepared for things to manage. The collapse wasn’t just a bump in the road— it was a sharp lesson that when fintech firms stumble, ordinary folks pay the price.

Our Board of Directors today approved a final statement of policy on bank mergers.

Last updated in 2008, this statement provides a comprehensive and transparent guide to how the FDIC will consider merger transactions under the Bank Merger Act. https://t.co/TcUBIZEwOU pic.twitter.com/3sXRp10NzF

— FDIC (@FDICgov) September 17, 2024

Now, the FDIC steps in— not with a gentle nudge, but a firm hand. This new rule they’ve proposed isn’t a quick fix… it’s a blueprint for a more transparent and accountable system. Banks will now be required to keep precise records: who owns what, how much, and when. It’s no longer enough to rely on fintech apps or other intermediaries to sort out the details. The responsibility falls squarely on the banks to know what’s going on. The goal? To prevent the chaos of lost funds and finger-pointing when things inevitably go wrong.

No more waiting for answers, no more confusion when systems fail. This rule is about bringing order to a partnership that has, at times, been anything but orderly. In a world where fintech grows faster than regulation can keep up, the FDIC wants to slow the runaway train— at least a little.

But there’s more to this than just record-keeping. At its heart, this new rule is about protection. Many consumers, lured by fintech’s shiny promises, believed their money was fully insured by the FDIC. They thought they were safe… until Synapse’s collapse shattered that illusion. The FDIC’s proposal wants to change that narrative, making sure that in the case of a bank failure, consumers can count on quick payouts through what’s called “pass-through insurance.” It’s a safeguard for the average person— so they would not suffer from any headache where their savings went when the systems fail them.

Fintech isn’t the only focus here. The FDIC’s eyes are also on another frontier: bank mergers. The Biden administration has been more cautious, slowing the rush to consolidate banks into bigger and bigger entities. Some argue that fewer mergers mean more competition and a healthier market… others believe it leaves the smaller banks too vulnerable, unable to stand up to giants like JPMorgan Chase. The debate over consolidation still goes on, and the FDIC is ready to step in, paying close attention to mergers that create banking titans with assets beyond $100 billion.

The FDIC issued a notice of proposed rulemaking that would expand its role under the Change in Bank Control Act of 1978. This change may well have implications for fund complexes, particularly those that include large passive index funds. https://t.co/X0FmDVQpt2 pic.twitter.com/mHyrVGTCSv

— Morrison Foerster (@MoFoLLP) September 16, 2024

As this new rule takes shape, the FDIC has opened a window— a 60-day comment period for the public to weigh in. It’s not a done deal yet. Voices can still be heard, opinions shared, and maybe even revisions made. But one thing is clear: the fintech world, for all its glittering promise, is a minefield of risks and rewards. The collapse of Synapse made that abundantly clear. The FDIC’s new rule is about getting ahead of the next collapse, about ensuring that the future of fintech isn’t built on shaky ground but on a foundation that build confidence for those who use it.

Major Points:

• The FDIC proposes new rules for banks partnering with fintech firms after Synapse’s collapse left 100,000+ users unable to access their funds.
• Many fintech apps pool customer money into large accounts, leaving them vulnerable when record-keeping fails.
• The new rule would require banks to maintain clear records of ownership, bringing more transparency to fintech partnerships.
• The FDIC aims to protect consumers through “pass-through insurance,” ensuring quicker payouts in case of bank failures.
• The FDIC is also scrutinizing large bank mergers, particularly those that create institutions with assets over $100 billion.

RM Tomi – Reprinted with permission of Whatfinger News