FDIC on Jan. 22 finalized revisions to its Brokered Deposit Rule (the Rule), identifying a clear path for financial technology (FinTech) companies to partner with banks in generating deposits. While the Rule acknowledges (and ostensibly leaves in place) the statutory restrictions on acceptance of brokered deposits by institutions that are not “well capitalized,” it broadens exceptions to the definition of “deposit broker.” In doing so, FDIC is making it easier for banks – whatever their capital position – to grow deposits placed by third parties.
Expanded View of Deposit Broker Activity
The revised Rule makes clear that placement by a third party of deposits with an insured depository institution (IDI) still constitutes deposit brokering, and specifies certain activity indicating brokerage activity. For instance, where the third party is involved in setting rates, fees, terms or conditions for the deposit account, or has authority – contractual or otherwise – to move the depositor’s funds from the IDI, the third party is engaged in brokerage activity. Similarly, FDIC identifies a new category of brokerage activity: matchmaking. Matchmaking occurs when the third party, using specific financial information of a depositor, allocates deposits to or among IDIs based on the deposit objectives of the two parties. FDIC makes clear that matchmaking – and the ability to shift allocations amongst IDIs based on the changing objectives of the depository or the depositor – indicates the third party / the matchmaker has influence over the movement of deposits and, as such, is correctly viewed as a deposit broker.
New “Primary Purpose of Enabling Transactions” Exception
Notwithstanding the expanded view of brokerage activity, FDIC carves out two new and import exceptions to the “deposit broker” definition, chief among them: Deposits made for the primary purpose of enabling transactions. Deposits placed by a third party for the primary purpose of enabling transactions by the depositor are excepted from the definition of “deposit broker,” meaning any insured depository may accept them regardless of capital adequacy.
Deposits are deemed made to enable transactions where (i) they are placed in transactional accounts, and (ii) the accounts do not pay any fees, interest, or other remuneration to the depositor. Accounts that pay fees, interest, or other remuneration to the depositor may still constitute accounts made to enable transactions, but are subject to a facts-and-circumstances test by FDIC. Where the third party markets and offers services to depositors for the purpose of enabling transactions, and (a) any fees, interest, etc. paid to the depositor is nominal, or (b) on average depositors placed by the third party engage in at least six transactions per month, FDIC will – upon application by the IDI or the third party – determine the primary purpose of such deposits is to enable transactions. That is, where the test is met, FDIC will not treat such deposits as brokered.
Exception Notice/Application Process
To clarify further the treatment of intermediated deposits, the Rule announces a new application process through which third parties (or IDIs on behalf of a third party) can receive a determination of status from FDIC. For deposits deemed made for the primary purpose of enabling transactions (i.e., transactional accounts paying no interest/fees to the depositor), FDIC requires only notice for the exception to apply. In other cases – where depositors earn fees or interest, or make on average fewer than six transactions a month – FDIC will review the entirety of the facts and circumstances around the program and determine whether it qualifies for exception. Applications require, among other things, (i) a description of the deposit placement arrangement, (ii) a description of the business line, (iii) the third party’s total assets under administration, (iv) the total amount of deposits placed by the third party, (v) a description of the marketing materials provided by the third party to depositors and (vi) an explanation of why the third party meets the primary purpose exception. FDIC may require approved third parties to report periodically to FDIC in order maintain the exception.
Implication for Banks, FinTechs
The implication of the new Rule for banks is clear: Sourcing deposits through intermediaries is no longer taboo. As a result, banks can expect increased efforts by FinTechs to source and intermediate deposits, and to market such deposits to banks large and small. Banks should take the opportunity to revisit their deposit objectives, and consider whether partnering with an intermediary may be attractive.
Chris Couch is a partner at McGlinchey and advises banks and other financial institutions on regulatory and operational matters as well as on compliance with banking and lending laws, rules, and regulations. He counsels national, regional, and community banks with respect to deposit operations, payment systems, treasury management products, consumer regulatory regimes, and new services offerings, including electronic and mobile banking.
