Summary:

  Last week the FDIC announced that it was issuing a new rule that will modify two definitions in the regulations regarding deposits that are facilitated by third parties to banks and other insured depository institutions (“IDIs”).  Given that the new OCC “Fintech Bank Charter” is dead in the water, this may be the most important development to-date on the regulatory response to fintech and a harbinger of what is to come. It is also a significant development for innovative financial nonprofits and financial institutions that serve distressed and lower income communities.

Background:

• A “brokered deposit” occurs any time a 3rd party facilitates a deposit between its customers/clients and a bank or other IDI. These deposits have been known as “hot money” that is often directed by brokers to banks paying the highest interest rates at the moment. Regulators have historically viewed brokered deposits as an unstable source of funding and have considered them indicative of a poorly run institution that may not be serving it’s local community. Poorly capitalized banks are prohibited entirely and well-capitalized banks usually incur reputational and regulatory demerits when they accept brokered deposits.

• The regulatory animosity towards brokered deposits arose in the distant past when banks were primarily local institutions and the Internet was a thing of the future. Much has changed since then. Interstate banking and technology have made geographical location less and less relevant to consumer finance. In addition, specialized fintechs focused on payments, online lending and other services have multiplied and fragmented financial services. 

Gimme Checking and Savings Accounts

• Despite all the change, most people still view federally insured savings and checking accounts as the safest, best and easiest place to keep their money and banks and regulators are keen on making sure this perception continues.  If you doubt this, take a look at the regulatory and bank industry response when online broker Robin Hood (not an IDI) ineptly tried to re-name versions of it’s money market accounts as “checking” and “savings” accounts. Robin Hood reversed its decision within 48 hours of the announcement.

• Many specialized fintechs would very much like to partner with banks to be able to offer clients checking and savings accounts. The problem has been that any time a 3rd party (such as a fintech or counseling agency) facilitates a deposit with a federally insured institution, the third party is considered to be a broker and the deposit a “brokered deposit” - with all the attendant negative implications.
  
  

• These third parties however generally have a stable relationship with their customers and simply want to add to their menu of financial services by partnering with a bank - and many banks would welcome a new stable source of deposits. This is  especially true of institutions that serve low and moderate income communities and need larger deposits without having to pay high interest rates on those accounts.

The Change

• With its rule change, the FDIC has significantly broadened the ability of fintechs and nonprofits  to partner with banks without having being characterized as a “deposit broker” - so long as the third party’s primary business is not accepting deposits ( it should be noted that the FDIC specifically excluded organizations that exist to “encourage savings” from the exemption). 

• More importantly, the FDIC has initiated an application process where any third party can apply to the FDIC and receive an exemption if it meets the requirements of the new rule. Once the exemption is granted, banks can receive deposits from the fintech’s customers without the deposits being characterized as “brokered deposits” by regulators.

The Inclusive Opportunity

• Financial nonprofits that provide counseling and empowerment services to LMI clients should see this as a significant opportunity.  It is going to become increasingly important that they be able to offer comprehensive services and connect their clients with the payment, savings and transactional services that best fit their clients’ needs. This rule change provides a significant opportunity for financial nonprofits to create new partnerships with banks and other insured depository institutions. 

Why This is Important

The most important aspect of this rule change is that it was driven primarily by the FDIC’s announced intention to support innovation in consumer finance. Not only does it do that but it also provides guidance on how regulators will facilitate the incorporation of largely unregulated fintech into the regulated world of banking. 

For deeper dives into the FDIC rule change on brokered deposits:

Speech on Brokered Deposits by FDIC Chair Jelena McWilliams 12/11/2019

FDIC - Full Text of Rule Change

Summary of Rule Change - Sullivan and Cromwell

Bloomberg - FDIC Proposes New Framework For Brokered Deposits in Fintech Era

Fintech Breakthrough? FDIC Posts Proposed Rule on Brokered Deposit Regulations -Crowdfund