FDIC Proposes New Recordkeeping Requirements for Sponsor Banks in BaaS

On September 17, 2024, the FDIC's rulemaking board unanimously approved a proposed rule imposing new recordkeeping requirements on sponsor banks participating in banking-as-a-service partnerships. The rule requires banks to maintain 'direct, continuous and unrestricted' access to records identifying beneficial owners of deposits held in pooled accounts and to determine beneficial ownership every business day. The regulation was prompted by the collapse of Synapse, a major fintech middleware platform, which exposed gaps in how deposits placed by third-party nonbank companies on behalf of consumers were tracked.

Rather than extending FDIC deposit insurance directly to fintech customers, the rule focuses on improving the accuracy and accessibility of records for funds held through intermediaries. The compliance burden is already accelerating a trend of banks exiting BaaS arrangements, with Five Star Bank announcing it would end its partnership with Unit, noting BaaS contributed only 2% to its deposits and 1% to its loans. Industry-wide, 61% of sponsor banks are shifting toward direct contracts with fintech partners rather than working through intermediary BaaS platforms to maintain more flexible and customized risk management.