Troutman Pepper Partners Alexandra Barrage and Matthew Bornfreund were quoted in the August 5, 2024 S&P Global article, “FDIC Proposal Would Classify More BaaS Deposits as Brokered, Not Core.”

“I would say a lot of these fintechs deposits are actually the opposite of hot money,” said Matthew Bornfreund, a partner at Troutman Pepper. “I think a problem with this proposed rulemaking is, the FDIC asserts that these are hot money and less stickier, more likely to run away from the bank than core deposits are, but they don’t actually provide any evidence or data to support those propositions.”

…

Adjusting to the change could create uncertainty for BaaS banks because there is no regulatory-defined brokered deposit threshold that banks are guided not to cross. If a BaaS bank would need to reclassify a large amount of deposits as brokered under the new rule, its examiners would require the bank to assess the impact on its liquidity in a relatively subjective manner, Bornfreund said.

…

So far, guidance on fintech partnerships has been a “disjointed approach” based on “piecemeal guidance,” said Federal Reserve Governor Michelle Bowman in a July 25 statement. Guidance is being folded under the umbrella of third-party risk management, mixed with very different subjects such as how banks use software internally or handle cybersecurity incidents. Industry participants also must read between the lines of consent orders and regulators’ remarks to decipher their expectations.

“That’s the trouble,” said Alexandra Barrage, a partner at Troutman Pepper. “When you’re a regulator, you want to come out with principle-based guidance, and you don’t want to be too specific, because you could inadvertently be cutting something off or preventing responsible innovation from flourishing.”

Regulators now appear more willing to be specific. In an interagency statement July 25, they peeled through fintech partnership risks with much more granularity, Barrage noted. Also, this statement for the first time segments fintech partnerships in ways that are consistent with core bank activities, Barrage said.

The agencies also issued a request for information July 25, which many industry experts viewed as a positive step to collect knowledge about nuances of various BaaS models.

“There’s a really tough balance,” Barrage said. “How do you provide more rules of the road when the universe is already pretty diverse?”