Responsible Partner Banking

As reported by IBAT in their Regulatory Dispatch communication, the Federal Deposit Insurance Corporation (FDIC) Board of Directors approved a notice of proposed rule making that would strengthen record keeping for bank deposits received from third party, non-bank companies accepting those deposits on behalf of consumers and businesses. The proposal seeks to address risks related to these third-party arrangements, protect depositors, and promote public confidence in insured deposits.

In our Infinant view, the FDIC will require that banks…

• know the actual owner of deposits placed at a bank by a third party;
• perform their own compliance with anti-money laundering and countering the finance of terrorism law;
• have real-time access to all customer, account, transactional data;
• are able to provide the depositor their funds even if the third party fails (so bank must own ledger that can easily tie to their bank mobile app).

In essence, the FDIC will require non-bank entities to hold customers’ funds in individual accounts at the bank and not in a single custodial account at a bank (e.g. eliminating the issue of custodial accounts holding funds of many thousands of consumers and businesses, and the bank may not readily know or be able to determine the individual owners of funds in the custodial account).

The Customer Account

The early success of Banking-as-a-Service and the subsequent advancement of regulatory guidelines to open up banking and to protect consumer’s deposits has created a virtual 3-way tug-of-war between regulators, financial institutions and fintech. This created friction and artificial drivers that are often misaligned for the bank.

• Fintech that worked directly with BaaS platforms for compliance and revenue share
• BaaS providers attempting to make fintech onboarding easy with quick volume ramp up
• Banks that own regulatory compliance and need to build sustainable programs while increasing revenue and fees

As one bank summarized, three separate parties were attempting to control customer accounts.

From an industry standpoint, the fintech owns the customer experience but the bank controls the customer’s account. This simple statement directs the customer’s account management, including compliance, regulatory and onboarding controls (e.g. KYC, KYB, AML), to the bank.

By removing the BaaS middleman and having a clear delineation of responsibilities, the model shifts away from a tug-of-war to a cooperative engagement focused on customer success, responsible banking and program profitability.

Banking is Still Banking

In looking at the delineation of responsibilities, with the FDIC’s Deposit Insurance Recordkeeping Rule for Banks, banks will need to…

• handle customers initiated through a third party as if those customers were coming thru the bank’s digital channels;
• have instant access to customer records, accounts and transactions;
• maintain a business continuity plan for fintech or partner failure;
• demonstrate the bank as the program manager for all controls, compliance and regulatory needs;
• maintaining data retention requirements.

This requires that banks maintain accounts on their own bank ledger but most banks do not have the capacity to do this on their core banking platform due to the inherent limitations:

• Legacy and modern cores were built for a single tenant, the bank.
• Some core providers provide a hack to define programs by branch ID or company ID, but these quickly break down at scale because data is co-mingled and not all core APIs support these tags.
• Core providers lack a console for bank partners (fintech or brand) to access customer and account information for servicing, often relying on batch data files and next-day updates which creates significant risk.
• Core providers often push banks to implement their newer core, costing $2M or more and freezing the bank for 18-24+ months.
• Side-car core propositions also carry all the same challenges and introduce a duplicative set of processes that result in compliance and regulatory control gaps.

The solution is deploying a virtual account platform that allows banks to maintain their existing core, while bringing a multi-tenant overlay above-the-core. This model provides the benefits of:

• Keeping the core platform in place and not disrupting the bank’s existing customer or operations.
• Maintaining existing controls, compliance and regulatory reporting.
• Launching programs that are segmented to ensure customer accounts, operating accounts and money movement are segregated by programs for accountable settlement and reconciliation.
• Hybrid models to settle to your legacy core G/L at operating account or end user levels.
• Gaining increased revenue and fees by working directly with fintech – with the fintech not also having to pay BaaS providers.
• Giving your partners (fintech or brands) the ability to service customers thru a bank-controlled console.

Solutions such as Infinant’s Interlace Platform are reshaping the embedded banking space to advance responsible banking while giving banks the ability to open up new deposit and fee incoming channels – either through bank-branded applications or partner applications.

A Common Practice

For those banks that are planning their initial launches, banks are alleviating regulatory friction by demonstrating how their embedded banking or BaaS programs are processed in a similar fashion to their existing digital channels. So regardless of which channel a customer may be onboarding from, the bank’s mobile app or a fintech app, they are all guided thru the bank’s common compliance, operations and regulatory lanes. In all cases, each customer and account resides on the bank’s platform, not outsourced to a processor, BaaS provider or payment provider (which creates an anomaly and could trigger a consent order).

Business Continuity

The new regulations have also surfaced the need for banks to provide regulators with a clear plan of how the bank maintains ownership of customer’s account and real-time data access. For those banks with existing programs, the bank will need to have a recovery strategy for the BaaS provider failure. This recovery strategy would be the ability to convert a fintech program from a BaaS provider over to a bank-controlled platform. Platforms such as Infinant provide this continuity by providing a white-label platform that allows a fintech to migrate their application onto the bank’s platform without disruption to the customer.

In addition, the platform also supports continuity if the fintech is on a failure path. Interlace provides a white-label digital application along with the virtual account system – allowing banks to ensure that customers can maintain their accounts and access to their money by converting fintech users thru a fast-track onboarding process.

Continued Progress

Infinant is working with various industry groups and advisory firms to advance responsible banking and to respond to the FDIC guidelines. We maintain a focus to give financial institutions a way to advance and grow their banks. We appreciate the efforts of American Fintech Council (AFC), Independent Banker’s Association of Texas (IBAT), Independent Community Bankers Association (ICBA) and others for their efforts in this space to advance responsible banking that promotes the ability for bank’s to grow through partners.

Our bank client base has grown to include banks launching new embedded banking programs, those that are pivoting away from BaaS providers, graduating their successful programs to a scalable bank-grade platform, or mitigating past decisions to resolve an existing consent order. This breadth of experience is allowing our bank clients to collaborate together to advance their banks.

Similar to early days of online banking, mobile banking or remote-deposit capture – we envision a similar alignment to regulatory guidelines and the purging of bad players and processes that will soon bring  significant avenues of bank growth. We look forward to being part of this path.