By W.B. King
In an open letter submitted to the Federal Deposit Insurance Corporation (FDIC) on November 25, 2024, the American Fintech Council (AFC) urged the withdrawal of a proposed rule on brokered deposits.
“This proposal would not only harm underserved communities, but also weaken the resilience of the financial services industry,” Goldfeder noted. “AFC is committed to advocating for sound, evidence-based regulation that promotes responsible innovation and supports all consumers.”
FDIC’s Approach
In July 2024, the FDIC Board of Directors approved a notice of proposed rulemaking to “strengthen the important prudential protections of the agency’s safety and soundness rule on brokered deposits (12 CFR 337.6).” This implements section 29 of the Federal Deposit Insurance Act. According to the FDIC, since the adoption of the 2020 final rule and the large bank failures in 2023, the proposed revisions “seek to strengthen the safety and soundness of the banking system, help ensure uniform and consistent reporting of brokered deposits and reduce operational challenges and reporting burdens on insured depository institutions (IDIs).”
In a released statement, FDIC Chairman Martin J. Gruenberg explained that the proposed changes address the “fundamental relationship between a bank, a depositor, and a third-party intermediary,” along with the risks the relationship may pose, noting the failure of the nonbank deposit broker Synapse Financial Technologies, which declared bankruptcy in April 2024. Reasons cited for the failure included regulatory lapses and mismanagement that resulted in a shortfall of nearly $95 million between bank-held funds and monies owed to fintech end users.
According to the AFC letter, the proposed rule mischaracterizes deposits obtained through bank-fintech partnerships. And contrary to the FDIC’s assertions, the organization said these deposits are exceptionally stable and well-documented.
“They serve as primary checking and savings accounts for consumers who use them for everyday banking needs, such as payroll deposits and debit card transactions, rather than rate-shopping,” the letter read. “AFC emphasizes that deposits originating from bank-fintech partnerships function similarly to core deposits at traditional financial institutions, offering no increased risk to the resilience of the financial institution or the Deposit Insurance Fund.”
Conversely, the FDIC said the proposed rule “would simplify the definition of deposit broker,” eliminate the “exclusive deposit placement arrangement” exception, and revise the interpretation of the primary purpose exception (PPE) to consider the third party’s intent in placing customer funds at a particular IDI.
The proposed rule would:
Allow only IDIs to file notices and applications for PPEs.
Revise the “25 percent test” designated business exception for a PPE to be available only to broker-dealers and investment advisers and only if less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more IDIs.
Eliminate the enabling transactions designated business exception.
Clarify when an IDI, which has lost its agent institution status, can regain that status for purposes of the limited exception for reciprocal deposits.
Undermining Competition?
In its open letter, AFC also contends that the proposed rule could negatively impact consumers as redefining brokered deposits and eliminating exemptions would undermine competition and innovation in the financial services industry. “This could disproportionately harm historically underserved communities that benefit from the affordable and accessible financial products offered through responsible bank-fintech partnerships. Without these partnerships, consumers may face increased fees and reduced access to financial services, driving them toward unregulated and potentially predatory alternatives.
AFC’s SVP and Head of Policy and Regulatory Affairs Ian P. Moloney noted that technological competition has been a hallmark of bank-fintech partnerships, helping to create a more inclusive financial services industry. The proposed rule, he contends, would stymy innovations.
“Without the competition and innovation provided in the current market, both community banks and the overarching financial services industry are less able to serve their customers effectively, particularly those who have been historically unbanked or underbanked,” Moloney said. “By pursuing the Proposed Rule as written, AFC believes that the FDIC will significantly harm innovation and competition in the financial services industry that has proven quite beneficial for improving banking services to all consumers.”