The Federal Deposit Insurance Corporation’s proposed rules for brokered deposits would be a setback for the agency and the industries it regulates, writes Brian Tate of the Innovative Payments Association.
Al Drago/Bloomberg
Winston Churchill famously said, “Never let a good crisis go to waste.” In that spirit, Federal Deposit Insurance Corporation Chairman Martin Gruenberg is justifying a complete reversal of a rule the FDIC enacted just three years ago that brought certainty to U.S. financial institutions and the fintech economy. In order to do so, he brings up an unrelated and isolated banking crisis.
In 2021, the FDIC finalized new rules governing brokered deposits. My organization strongly supported the FDIC’s efforts to design a new framework. This is because it is a positive step in regulatory modernization. In fact, research produced by the Innovative Payments Association (then called the Network Branded Prepaid Card Association) laid the foundation for what would become the Enabling Transaction Test (ETT).
The 2021 rules are intended to protect financial institutions and consumers from deposit brokers who simply chase higher interest rates. The 2021 regulations were a direct recognition that innovation in the payments community is benefiting customers by providing new, lower-cost banking products to those without access to traditional banking services.
Recent changes to the agency’s brokered deposit rules proposed by Chairman Gruenberg and the FDIC Board of Directors would completely eliminate brokered deposit classification exceptions, including ETTs, that the agency introduced in the first months of the Biden administration. . With the creation of ETT, the FDIC recognized that the payments community plays a major role in bringing more people into the financial services system.
The truth is, if the FDIC is able to finalize its proposed changes, the impact will go far beyond fintech products. Under the FDIC’s proposal, various payment products such as PayPal, Venmo, and Cash App that millions of Americans use to manage their daily finances could be considered “intermediaries.” .
Such broad classifications ultimately increase the cost of bringing innovative products to market, limit consumer access to much-needed basic banking products, and undermine the national economy. This will ultimately reduce consumer choice at a time when consumer and commercial confidence is fraught with uncertainty.
Financial institutions are not mobile phone companies, so they must partner with third parties to be part of the electronic world that consumers now live in. This means that under the proposed regulations, all deposits from banks will be partnered with payment apps. Banking interfaces with mobile phones would be classified as inherently dangerous. The FDIC said the Bank Merger Act, which regulates the transfer of deposits from one bank to another, makes it difficult for the agency to recognize that fintech deposits are some of the most stable deposits in consumer banking. Regardless, we decided to take this step. The Bank Merger Act is enforced by the FDIC.
Gruenberg points to the failures of Signature Bank, Silicon Valley Bank, and Synapse as reasons for this reversal. The truth is, if you read the FDIC’s report on Signature and the Fed’s report on SVB, you’ll see that the failures of these institutions were primarily due to mismanagement, not brokered deposits. Finally, Synapse partnered with three banks that were supposed to be exempt from any of the exceptions.
By now, you might be thinking that the FDIC Board has additional evidence or empirical research proving the need to eliminate the 2021 changes. I will do that. However, the referenced study was published nearly a decade before the 2021 rule went into effect. This study was conducted at a time when the FDIC had no idea about the use of new technologies that would allow consumers to manage their everyday money in the palm of their hands.
Thus, a review of the 2022 Federal Reserve Payments Survey demonstrates that payment usage increased by almost 10% during the pandemic. This rate of increase was more than double the rate of increase in the previous three years and more than three times the rate of increase from 2000 to 2018. According to the FDIC’s 2022 Unbanked and Underbanked Survey, U.S. unbanked interest rates are at the lowest national level since then. The agency began the investigation in 2009. The payments community played a key role in making this happen.
Almost a year ago, I wrote an op-ed titled “There’s No Need for the FDIC to Tinker with Brokered Deposit Rules,” predicting that the FDIC might continue down this path. Unfortunately, the FDIC is trying to ignore reality and force Americans to bank the way the agency wants based solely on ideology. We should demand more from government regulators who can’t see the forest for the trees. If the FDIC backs down on this dangerous step, American consumers will suffer a major setback as well.
