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Fintechs Enter Regulatory Gray Areas

High risk merchant accounts and providers could face scrutiny amidst new FDIC inquiry.

As an explosion of payment technologies continue to impact the way consumers make transactions, fintech companies have now found themselves in a “regulatory gray area”. Critical questions about compliance and protecting consumers have come to fore, as regulatory bodies such as the Federal Deposit Insurance Corporation (FDIC) have come knocking on fintech’s door. 

Regulatory Body FDIC, Steps In

It was on February 26, 2020, that the FDIC released a notice in the Federal Register in search of input about possible changes to not only its current sign, but also on  advertising rules. Their goal is to accurately demonstrate how banks and savings associations are modifying their business models to accept deposits through brick and mortar branches, digital, and “mobile banking channels.”

In addition to the modernization of its sign and advertising standards, the FDIC has also sought information as to how technological solutions can be maximized to assist consumers to better differentiate “FDIC-insured banks” and savings associations from institutions that are not insured by the FDIC. These would include “nonbanks” found online and “digital channels”. 

The FDIC is also releasing a “Request For Information” (RFI), in which it hopes to collect feedback from consumers about FDIC’s measures to be taken to adjust its policies. These efforts are also for the purpose of keeping up with how banks currently accept deposits and sell products. Finally, this inquiry seeks to find out how customers interact with banks, “including through evolving channels.”.

Another aspect that the FDIC hopes to receive input on is misrepresentations, whether they be intended or unintended, regarding deposit insurance.

According to the FDIC website, “This effort is consistent with the FDIC’s commitment to increase transparency, improve efficiency, support innovation, and provide opportunities for public feedback on issues affecting FDIC-insured institutions and their customers.”

All comments on the RFI document were to be submitted by March 19, 2020.

Times Are Changing

The need for a regulatory body such as the FDIC to step in is a clear indication that banking has seen a dramatic change in the way money is finding its way both in and out of banks. 

With so many companies coming into the payment landscape, it is no wonder that the times are ripe for lucidity and transparency from companies.

Challenger banks, a new type of bank that seeks to compete with larger, traditional banks, have burst into the scene as another iteration of a financial institution, yet they are not, “federally insured deposit institutions.” In fact, they use a “partner FDIC-insured institution” for their deposit insurance.

Back in October, 2016, The Consumer Financial Protection Bureau (CFPB) issued a new rule on prepaid accounts that granted complete consumer protection. Customers were given complete transparency on fees, legal rights, and protection against loss, theft, or error. Digital wallets were also included under this new rule. 

The gray area was further complicated by the fact that the CFPB stated, “the Bureau declines to limit coverage under the definition to accounts held in a pooled account structure”. They claimed that the prepaid accounts’s integrity has nothing to do with the product’s, “back-office infrastructure.”

Questions Beget More Questions

The FDIC most certainly faces a complex conundrum as it seeks to wrangle maverick players in the payments industry to form a more cohesive payment ecosystem.

Time will only tell how things will be played out. And if certain payment giants get their way, things could become the wild west, with only a few agencies making up the rules as they go. This would certainly leave banks and consumers in a precarious position.