New FDIC Proposed Rule on Deposit Insurance Record-Keeping: A Vital Step for Bank-Fintech Transparency

September 17th, 2024 marked a significant milestone in the financial industry as the Federal Deposit Insurance Corporation (FDIC) proposed a new deposit insurance record-keeping rule for banks with third-party accounts. https://www.fdic.gov/news/press-releases/2024/fdic-proposes-deposit-insurance-recordkeeping-rule-banks-third-party

Often referred to as the "Synapse Rule," this proposal came in response to the recent collapse of Synapse, where many customers found their funds locked and inaccessible. Despite the fact that all the money was insured, banks struggled to access these funds due to inadequate visibility into end-user accounts and balances. This incident highlighted a critical gap in the relationship between banks and fintechs: while funds are insured, without proper records, it becomes impossible to determine what to pay out.

The Role of FBO and Omnibus Accounts in Fintech

The use of For Benefit Of (FBO) or omnibus accounts has become widespread in the fintech industry, forming the foundation of many bank-fintech partnerships. FBO accounts hold funds on behalf of end customers, aggregating multiple customers' funds into a single account. For example, if ten customers each have $100, the FBO account would reflect a total of $1,000. However, many fintech banks do not reconcile these accounts directly and rely on the middleware or fintech companies to provide accurate balance positions. This information is usually stored in separate systems managed by the middleware provider or fintech itself.

This dependency on third-party systems can lead to significant risks. If the fintech's calculations are incorrect or if there is a software glitch in its ledgering system, banks may be unaware of discrepancies in their balances. Without direct oversight or reconciliation, banks are left in the dark, unable to verify the accuracy of their records—a situation that the proposed FDIC rule aims to address.

Reconciliation Challenges and the Rise of ReconSeer

Over the past 15 years, I have personally encountered numerous instances where third-party ledgers were not reconciled, often discovering millions of dollars that were unaccounted for. This experience led to the development of ReconSeer, a reconciliation software designed to achieve high levels of accuracy and speed in reconciling external ledgers. ReconSeer operates as a shadow ledger, ensuring that all financial records are in sync and discrepancies are swiftly identified and corrected.

Recently, there has been a surge in the promotion of virtual ledgers, but it is crucial to understand the differences between virtual ledgers and shadow ledgers.

Virtual Ledger vs. Shadow Ledger

Virtual Ledger: A virtual ledger is a digital representation of a ledger that reflects real-time transactions and balances but does not serve as the primary record. It is typically used for visualization, simulation, and reporting purposes. Virtual ledgers are valuable for scenarios such as fraud detection, budgeting, or running simulations. They can aggregate and display data from multiple sources, providing organizations with a consolidated view of financial movements and positions. However, virtual ledgers are not designed to identify discrepancies in the main ledger. If errors exist in the primary ledger, the virtual ledger will reflect the same inaccuracies without the means to detect or correct them.

Shadow Ledger: In contrast, a shadow ledger is an independent, secondary ledger maintained to validate and cross-check the primary ledger's accuracy and integrity. Its primary function is to support reconciliation, audit, and fraud prevention efforts. A shadow ledger captures every transaction in real-time or near real-time, comparing it against the main ledger to identify any anomalies or discrepancies. This proactive approach enables institutions to detect and resolve issues before they escalate, ensuring that financial records are accurate and reliable.

How ReconSeer Enhances Reconciliation

ReconSeer goes beyond traditional reconciliation methods by matching every transaction processed through various channels, including checks, Automated Clearing House (ACH) transfers, Real-Time Payments (RTP), FedNow, card transactions, and cash movements. It reconciles these transactions against the main ledger in real-time, near real-time, or batch processes, offering a precise depiction of financial entries for millions of accounts at scale.

This is analogous to balancing a checkbook, but on a massive scale involving millions of accounts. Daily reconciliations enable banks and fintech companies to address financial discrepancies immediately, saving on costly audits and potential legal fees. By maintaining a shadow ledger that continuously verifies the accuracy of financial records, ReconSeer empowers institutions to uphold the highest standards of financial integrity and transparency.

The Importance of the FDIC’s Proposed Rule

The FDIC’s proposed rule represents a crucial step forward in enhancing the transparency and accountability of banks and fintech partnerships. By requiring banks to maintain accurate records of end-user accounts, this rule ensures that banks have a clear understanding of their cash positions and consumer balances. This clarity is essential for lending decisions and for providing deposit insurance.

In an industry increasingly dominated by complex financial products and third-party relationships, robust record-keeping is not just a regulatory requirement but a business imperative. The implementation of this rule will compel banks to adopt more rigorous reconciliation processes, ultimately safeguarding consumer funds and maintaining trust in the financial system.

Conclusion

The proposed FDIC rule is a timely and necessary intervention to prevent scenarios like the Synapse collapse from recurring. By mandating improved record-keeping practices, the rule ensures that banks are better equipped to manage third-party accounts and protect consumer funds. As the financial landscape evolves, tools like ReconSeer will play a vital role in helping institutions maintain accurate and reliable financial records, reinforcing the stability and resilience of the banking system.