Democratic senators have urged regulators to ban the use of the Federal Deposit Insurance Corp. name or logo by firms that provide products only eligible for pass-through FDIC insurance and establish clear rules for banking-as-a-service companies.

In a letter sent last Wednesday, Sens. Elizabeth Warren, D-MA, and Chris Van Hollen, D-MD, highlighted the partnerships between banks and BaaS providers like Stripe, Finastra, Synapse, and Marqueta as well as those between banks and fintechs like Venmo, Cash App, Yotta, and Chime. They argued that the ties pose a threat to consumer safety and soundness.

They also asked the heads of the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC to exercise their power under the Bank Service Company Act and the Federal Deposit Insurance Act to directly monitor the organizations and bring enforcement action against the companies if they violate the established rules.

“The rapid growth of these partnerships risks harming consumers while posing a broader threat to the stability of our banking system and the economy,” the senators wrote. “The risks are clear.”

Revenue from BaaS is expected to reach $17.3 billion in 2026, according to the letter. 

Bank-fintech partnerships “can involve elevated risks,”  including providing misleading or insufficient information to end users, the senators wrote.

Warren and Van Hollen pressed the heads of the federal agencies to prohibit the use of misrepresentations related to FDIC insurance. Companies like Yotta, they wrote, put more emphasis on “FDIC-insured” in large text on their websites while explaining what the term means – that the money is held in an account eligible for pass-through FDIC insurance of up to $250,000 through the partner bank – in smaller text.

They clarified that pass-through deposit insurance refers to a process by which deposit accounts are established by a third party for the benefit of one or more other principal parties.

Disclaimers about FDIC insurance intricacies need to be improved, and consumers shouldn't need to decipher complex insurance details to manage their finances, the senators said. 

“Consumers must feel confident that they are dealing with a regulated and insured entity when they see the FDIC logo,” they said.

In March, the FDIC demanded three companies and certain associated parties cease making false and misleading statements about FDIC deposit insurance. The senators commended the FDIC's enforcement actions against banks like Evolve Bank & Trust and Blue Ridge Bank, pushing those lenders to better monitor their third-party relationships.

“The growing integration of the services offered by apps such as Venmo, CashApp, and PayPal into bank infrastructure through BaaS intermediaries such as Synapse requires additional oversight by your agencies — and the establishment of clear rules instead of the ad-hoc enforcement approach that you have used to date,” the lawmakers asserted.

They also applauded the Consumer Financial Protection Bureau for recognizing the growing importance of nonbank financial technology companies, some of which now handle over five million transactions annually.  The lawmakers applauded the CFPB's expanded oversight under the Consumer Financial Protection Act and backed its proposal for stricter enforcement of consumer protection laws across the fintech industry.

The call for strict oversight follows the collapse of fintech Synapse, which acted as a middleware provider between BaaS providers and fintechs. Synapse filed for bankruptcy in late April and signed a $9.7 million deal allowing money movement platform TabaPay to acquire its assets. But the deal fell through less than three weeks later, with TabaPay citing Synapse’s failure to meet closing conditions as the reason for the deal’s termination. 

Synapse’s failure hurt some 100,000 consumers with $265 million in deposits – “a salient example of the harms posed by lack of oversight of BaaS providers and fintech companies,” the senators pointed out. 

The middleware provider’s faulty recordkeeping left roughly $300 million in customer deposits inaccessible for months, with more than $95 million still unaccounted for.

The collapse of Synapse led to a wave of disruption in the fintech landscape: Copper, a teen-focused fintech, abruptly shut its doors, and Yotta, a savings app, said in June that around 85,000 of its customers were locked out of their accounts. Both used the bankrupt Synapse and Evolve to conduct their business. 

Since fintechs are not banks, they are not insured by the FDIC and are not regulated by either the Fed or the FDIC, Michele Alt, founder and partner at Klaros Group, has said previously.

Additionally, since none of the banks Synapse partnered with, like American Bank, AMG National Trust, and Lineage Bank, have failed, the FDIC could not intervene or pay the harmed customers.

Though funds at Evolve are FDIC-insured, it’s still an operating bank and not a failed institution. However, Alt pointed out that many end users whose funds have been frozen at Evolve feel that the advertising and disclosures related to FDIC insurance were misleading –- echoing the senators’ views. 

“It’s understandable that they would read ‘FDIC-insured’ to mean ‘absolutely guaranteed.’ But that is not what FDIC-insured means,” she said in an email at the time. 

By Rajashree Chakravarty on Sep 17, 2024
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