The
"Reconciliation discrepancies are common, but not usually on a large scale," said Michele Alt, partner at Klaros Group. "You rarely, if ever, hear of a challenge like this."
Yet more failures of
"The fact that the funding ecosystem has reverted back to a level of normalcy is part of what makes this hard," said Jason Henrichs, founder and CEO of community bank consortium Alloy Labs Alliance.
He predicts more fintech shutdowns as funding dries up and startups with shaky business plans struggle to turn a profit.
"We're in the first part of the cycle," said Henrichs. "This stuff has not hit the fan yet. The fan is wound up."
There are several ways a bank-fintech partnership could go sideways. A critical vendor, such as a middleware provider or card issuer, could go out of business. A fintech may choose to switch to a different bank partner or may be forced to shut its doors.
Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, told Synapse's partner banks, fintech companies and investors to pool together resources to immediately restore customer's access to deposits frozen in lengthy bankruptcy proceedings.
Ideally, banks have "unfettered access on a daily basis" to data from their fintech partners, said Allen Osgood, CEO of Eisen, a company that helps financial institutions with account closures, disbursements and escheatment. This is the case with a number of his clients. Others are counting on a "BaaS dashboard," where failures somewhere in the banking-as-a-service relationship could block access to essential data.
"Any time you have data that lives in one place that is critical to a vendor who can't see it somewhere else, you have a choke point," he said.
Sunrise Banks in Saint Paul, Minnesota, sets up contracts directly with its fintech partners, to whom it provides prepaid and debit cards.
"We structure our relationships and funds flow so customer deposits are always sitting in the bank," said Teri Hodgett, chief risk officer at the $2.3 billion-asset bank. "If a fintech partner went bankrupt or had other issues, we are in control of those deposits."
Sunrise requires its partners to keep reserve balances with Sunrise — for instance, in case of negative balances. The bank holds separate for benefit of, or FBO, accounts for each fintech partner.
"I thought that was pretty common, and I'm learning that maybe it's not," said Hodgett.
What "FDIC insurance" signifies
A major complication is that with fintechs that provide banklike services, the suggestion on their websites, in their FAQs or in their marketing materials of FDIC insurance does not mean what many people think it means.
The agency issued a consumer alert in June highlighting the fact that when people store funds with a nonbank company, they are eligible for "pass-through" FDIC-deposit insurance coverage only if the underlying bank fails and if other conditions are met. For instance, the records maintained by the bank or third party on behalf of the depositor must identify the actual owner of those funds.
"The chances that a customer of a fintech would understand this are exceedingly slim," said Alt.
Moreover, it is impossible for a consumer to tell if a fintech, middleware provider or bank is accurately maintaining these records, points out Jesse Silverman, counsel at Troutman Pepper.
If the fintech fails, it is ultimately up to the partner bank to return customer funds.
"The bank is responsible for a full and complete record of account ownership," said Reid Whiting, chief banking officer of Five Star Bank in Warsaw, New York.
The $6.3 billion-asset Five Star has six active fintech partners. Some are
"We are not in this to chase financial outcomes at the expense of compromising our control framework," said Whiting.
The FDIC
These efforts still gloss over some sticking points.
"They would issue memos and call out that you are not using the logo correctly," said Henrichs. "Forget about logo placement. To not deal with the fundamental ambiguity of how an FBO account works and what is covered, and that it's not if the fintech goes bankrupt but if the bank goes bankrupt — consumers don't understand the standards that need to be met."
The messaging dilemma
"The concern here for the
For banks, that means requiring real-time access to account ledgers and improving communication with consumers, said Silverman.
"It's been devastating to listen to the bankruptcy hearing and to consumers calling in," he said. The fintech is the face of the customer relationship, "but the bank should require its partners to provide more clarity."
The form that disclosure takes is an open question.
"It's something I am very much thinking about in my practice and what to advise clients," said Silverman. "But one thing that is clear is there is major customer confusion and everyone in the ecosystem needs to do a better job of clarifying."
In Alt's view, banking-as-a-service banks should communicate how they ensure the safety of funds held at the bank and that they have robust reconciliation systems with their fintech partners' subaccounts, where they can establish to the penny who owns what in those pooled accounts.
Osgood suggests that banks and fintechs run tabletop exercises together to plan for potential failures. Normally, those happen within parties rather than between parties, he finds.
"It's crucial that we don't throw the BaaS baby out with the bath water," said Alt. "Millions of consumers get their financial services through fintech-bank partnership relationships that are successful and mutually beneficial."
