Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on Stopping Fintech Deposit Meltdowns

Over the past decade, we have seen a significant incursion into consumer deposit taking and payments activities by companies that aren’t banks or credit unions. These firms want the public benefits of being a bank or credit union, without the public obligations.

This trend poses significant risks. We have developed a legal framework for banks over the past century designed to ensure people’s deposits are safe and that they have constant access to their funds. Deposit insurance and the special FDIC resolution process protect people if the bank fails and they retain quick access to their cash. When nonbanks engage in deposit taking, whether directly or in partnership with a bank, all these protections may not apply.

Today, the FDIC Board of Directors is proposing a rule that would strengthen requirements for banks that partner with nonbanks in offering deposit-style products.

This year, Synapse, a middleman between nonbanks offering deposit-style products to end users and their partner banks, filed for bankruptcy. The firm appears to have failed to properly track customer account balances and may have engaged in other shady practices. As a result, tens of thousands of customers have had their funds frozen for months. The banks have been unable to reconcile all the records necessary to get end users their funds back. This has led to severe harm, especially for people who were using the nonbank account as a primary checking or savings account.

If one of the bank partners had failed, instead of Synapse, the horrible account balance tracking may have prevented the FDIC from making quick deposit insurance determinations and returning funds promptly to end users. When consumers do not have access to their funds, it can undermine confidence in the financial system and ruin lives.

The proposed rule would require banks to maintain records identifying the ultimate end users, their balances, and other information for custodial accounts with transaction-style features. Banks would still be permitted to maintain these records through a third party as long as certain protections are in place, including daily reconciliations to make sure the numbers at the customer-level add up. Banks would also have to maintain constant access to the records, including in the event of the nonbank’s bankruptcy or other disruption. This framework would expedite an FDIC insurance determination if the bank fails and prevent the type of chaos we’re seeing with the Synapse bankruptcy if the nonbank fails.

To be clear, this rule would not address all the risks posed by banking with a nonbank. Even if all the records are appropriately maintained, there still may be some delay in getting end users their money back as the nonbank’s bankruptcy proceeding plays out.¹ In addition, nonbank deposit taking offered directly without a bank partner is generally outside the jurisdiction of the federal banking agencies.² If the firm fails, consumers become unsecured creditors of the nonbank’s bankruptcy estate and may lose their funds.

This proposal must not be the end of our collective work on this issue.

First, disclosure requirements related to the intricacies of pass-through deposit insurance are woefully inadequate. Consumers should, at the very least, be told clearly and concisely that they could face delays or lose their money by banking with a nonbank.

Second, we must continue to take enforcement actions against nonbanks that make misrepresentations about deposit insurance or misuse the FDIC name or logo.

Finally, for nonbanks like Venmo, PayPal, and Cash App, that offer deposit-style products directly, state and federal policymakers should consider requiring these firms to promptly sweep people’s balances to their linked insured account automatically. Under their state licenses, these nonbank firms are supposed to be in the money movement business, not the banking business of keeping deposits.