Facts, not bias, should determine the FDIC's brokered deposit rule

Al Drago/Bloomberg

Winston Churchill famously said, "Never let a good crisis go to waste." In that spirit, Federal Deposit Insurance Corporation Chairman Martin Gruenberg is invoking unrelated and isolated bank crises to justify a complete reversal of rules the FDIC implemented just three years ago that provided certainty to America's financial institutions and fintech economy.

In 2021, the FDIC finalized the new rules regulating brokered deposits. My organization strongly supported the FDIC's efforts to design a new framework because it was a positive step forward in modernizing the regulations. In fact, the research produced by the Innovative Payments Association (then called the Network Branded Prepaid Card Association) laid the groundwork for what would become the Enabling Transaction Test, or ETT. 

The 2021 rules were designed to protect financial institutions and consumers from deposit brokers who were simply chasing climbing interest rates. The 2021 regulations were a direct acknowledgment that innovations in the payments community were benefiting customers by delivering new low-cost banking products to people who did not have access to traditional banking. 

The recent changes proposed by Chairman Gruenberg and the FDIC's board of directors to the agency's brokered deposits rule would completely eliminate the exceptions to brokered deposit classifications, including the ETT that the agency put in place during the first months of the Biden administration. By creating the ETT, the FDIC acknowledged the large role the payments community plays in bringing more people into the financial services system. 

The truth is that if the FDIC can finalize their proposed changes, the implications would go well beyond fintech products. Under the FDIC's proposal, many different payment products such as PayPal, Venmo and Cash App that are used by millions of Americans to manage their day-to-day finances could potentially be considered "brokered."  

Such a broad classification will eventually increase the cost of bringing innovative products to market, limit consumer access to sorely needed basic banking products, and ultimately reduce consumer choice at a time when consumer and commercial confidence in our national economy is full of uncertainty. 

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Because financial institutions are not mobile phone companies, they must partner with third parties to be a part of the electronic world consumers currently live in. This means that, under the proposed regulations, any deposit from any bank partnership with a payment app, which helps the bank interface with a mobile phone, will be labeled inherently risky. The FDIC took this action despite the fact the agency knows fintech deposits are some of the most stable deposits in consumer banking due to the Bank Merger Act, which governs the transfer of deposits from one bank to another. The Bank Merger Act is enforced by the FDIC. 

Gruenberg cites the failures at Signature Bank, Silicon Valley Bank and Synapse as the reason for this sweeping reversal. The truth is, if you read the FDIC's report on Signature, and the Fed's report on SVB, you will learn that each institution failed primarily due to mismanagement, not brokered deposits. Lastly, Synapse partnered with three banks, which should have disqualified them from any of the exceptions.  

By now you might be thinking the FDIC board has additional evidence, or empirical research demonstrating the need to eliminate the 2021 changes. They do. However, the referenced research was issued nearly 10 years before the 2021 rules went into effect. This study was done at a time when the FDIC could not have conceived of the use of new technologies that enable consumers to manage their day-to-day finances from the palm of their hand.

Accordingly, a review of the 2022 Federal Reserve Payments Study demonstrates that payments usage rose during the pandemic by almost 10%. This increase was more than double the rate of the previous three-year period and more than three times the rate of increase from 2000 to 2018.  According to the FDIC's own 2022 unbanked and underbanked study, the U.S. is at its lowest national unbanked rate since the agency began the study in 2009. The payments community played a significant role in making that happen.  

Almost one year ago, I wrote an op-ed entitled, "There is no need for the FDIC to tinker with its brokered deposits rule," where I anticipated that the FDIC might go down this path. Unfortunately, the FDIC is set on ignoring reality, forcing Americans to bank the way the agency wants them to simply out of ideology. We should demand more from the government regulators who cannot see the forest for the trees. If the FDIC takes this risky step backward, the American consumer will take a giant leap backward as well.