In response to accounting concerns, the FDIC proposed new reconciliation requirements for “deposit accounts with transactional features.” The proposed recordkeeping rule requires the bank to maintain “direct, continuous, and unrestricted access to the records” of any third party maintaining ledgers for CDAWTFs.

However, the Troutman Pepper report argues that the term third party ledger accounts is a better term because it more accurately captures the risks involved when the bank does not maintain its ledgers directly and can be applied to any type of account, without limit it to custodial accounts. accounts.

Banks must also focus on “ledger hygiene,” requiring fintechs to have separate accounts that more clearly define funds for customers, transactions, third-party payment fees, contingency reserves and network regulations.

Banks should distinguish individually identified subaccounts from general pooled accounts, particularly when middleware companies like Synapse are involved, the report recommends. However, the report reveals that the FDIC’s recordkeeping rule does not account for subaccounts, a common feature of fintech partnerships. Middleware providers are helping to bridge the gap between traditional banks and fintechs using the latest technologies.

Partner bank lapses

Banks and fintechs should have a contingency plan in case partnerships fail. These plans should anticipate the operational risk associated with a general ledger outage, identify ways to mitigate the risks, and deploy reserves to restore end-user integrity in such an emergency.

Following Synapse’s failure, Evolve Bank & Trust received a cease and desist order from the Federal Reserve approximately two months after Synapse declared bankruptcy following a review conducted in early 2023, while another partner bank, Lineage Bank, received a consent order. by the FDIC in late January of this year. Although the timing of the previous review was not specified in either case, it was evident that the partner banks were aware of compliance issues related to their middleware provider, Synapse.

The consent orders against two of Synapse’s partner banks related to their board governance and BSA/AML issues without detailing the underlying issues, which could obscure those partner banks’ relationships with other parties outside of Synapse.

A different accounting solution is needed to track the flow of funds in any multi-stakeholder bank-fintech partnership ecosystem, the report said.

Regulatory gaps

Regulators should prioritize the most critical risks when issuing a consent order to a bank, moving away from a “tick box” model of supervision and towards a “risk-based” model of supervision , the report says.

Regulators have highlighted the complexity of banking-as-a-service arrangements and have disclaimed any oversight responsibility in regulating the non-banks involved. To address this, monitoring processes could be updated to interact more directly with banks’ fintech partners, enabling earlier identification of risks through technology and allowing both the bank and fintech to take corrective action , the report says.

Another question raised by the report, highlighting the more than 300-day delay between a reported review and the issuance of a consent order, was whether supervisors needed additional resources to work more effectively.

“How do the teams (of the Financial Sector Regulatory Authority) and those of the banking regulator work together? » Alexandra Steinberg Barrage, partner at Troutman Pepper, noted. In Synapse’s case, there was a broker, “but was there coordination on what the broker actually did, or what their modular banking business model actually was?” she said, adding that it’s hard to know because there isn’t much information available.

Gross mismanagement

Qualified staff are essential to effective bank-fintech partnerships, and fintechAccording to the report, a focus on speed to market could conflict with compliance requirements. In bank-fintech partnerships, fintechs need leadership with deep expertise in risk management and banking supervision with a strong focus on compliance, regular and adequate training programs and the need for interdisciplinary teams, says the report.

The interinstitutional guidelines also require banks to assess the depth and expertise of fintech partners’ staff, ensure their own staff have the knowledge necessary to manage risks, and assess the qualifications of key personnel.

“Right now, the industry is already taking very significant steps to create standards that would bind them, because right now they are not overseen or reviewed by banking regulators; Yet they are integral to how the bank operates these programs,” Steinberg Barrage said.

“So as a next step… we’re working with people on the banking side and the technology side who are very focused on best practices, to ultimately develop that towards empowering the sector,” she said, “And I think it’s absolutely the right time for that to happen.