The report follows initial concerns raised by the FDIC and two other federal banking regulatory bodies in late July, which introduced specific guidance requiring all banks under its jurisdiction to monitor and regularly reconcile any accounts they hold or manage – no matter the source or type of relationship involved.

The FDIC, Office of the Comptroller of the Currency, and Federal Reserve issued their highly unusual joint statement and request for comments after partner bank account reconciliation challenges, resulting in the inability for thousands of clients to access hundreds of millions in third-party account balances, persisted for more than three months following the bankruptcy of a prominent fintech go-between in April.

Clarity and new regulations on third-party reconcilement requirements coming soon

The result of federal regulators’ emergency consideration of fintech-banking partnerships is expected later this month through new rules formally proposed reminding FDIC-insured institutions that any accounts and funds held therein will be the providing banks’ sole responsibility, regardless of the source of the funds or transactions involved, or any technical or operational third-party arrangements that might be in place between these institutions and financial technology companies or service providers.

Effectively, the FDIC’s expected action means any federally insured bank doing business in the United States or overseas territories will need to comply with the clarified rules, and it’s possible this mandate could have broad implications on future bank-fintech embedded finance and “for benefit of” (FBO) relationships now in place.

The major step-up in reconciliation and monitoring requirements by a key federal banking regulator may be coming too late to prevent substantial damage to some victims’ lives and livelihoods. Millions of dollars in customer accounts, held by as many as 100 online, nonbank financial services providers, including Dave Inc., Juno, Mercury, Yieldstreet, Yotta and a handful of smaller online companies were impacted by the sudden and highly-publicised bankruptcy of Synapse Financial Technologies on 22 April, 2024.

Synapse bankruptcy led to reconcilement woes and frozen funds for thousands of fintech clients

In an article published last month in Finextra, we shared the sad and surprising stories of how customers of ten-year-old Synapse had lost access to their funds when the company failed – claiming to have less than $2 million in cash on hand and owing multiples of that to creditors. More specifically, because Synapse positioned itself as an intermediary, banking-as-a-service (BAAS) processor of choice for several fintechs and their FDIC-insured banks, many customers of those fintechs were caught unawares when their accounts were frozen following the middle-man fintech Synapse’s demise.

During testimony before the US Bankruptcy Court handling Synapse’s Chapter 11 reorganisation proceedings, some of these fintech end users shared a number of terrifying tales about how inability to use their own money for months since Synapse ceased operations had devastated their lives. Some lost all their savings, some missed key payment deadlines or important business opportunities, others couldn’t pay for medical procedures, and all were very unhappy.

Synapse’s tangled account web leads to unprecedented combined warning from federal regulators

Synapse, a well-funded Silicon Valley-backed and San Francisco-based fintech with a web of up-and-downstream partners scattered across the country and several industry sectors started to show signs of serious weakening in October, 2023, laying off a substantial percentage of its employees at that time.

When the company filed its bankruptcy petition in April of this year, banks providing depository homes for these fintechs and their clients’ funds, including Evolve Bank and Trust, AMG National Trust, Lineage Bank, and American Bank, together held more than $250 million in FBO funds related to those relationships – this according to a 24 May report from the court-appointed bankruptcy trustee. The total of funds still held pending an apparently difficult-to-complete reconcilement process has been substantially reduced, yet according to the trustee remains at $65-95 million as of the latest report issued at the end of August.