USA Trends and Developments Contributed by: Donald J. Mosher, Kara A. Kuchar, Melissa G.R. Goldstein, Jessica Romano and Adam J. Barazani, Schulte Roth & Zabel LLP
necting its customers and their end-users to Synapse’s partner banks. Synapse maintained the ledgering for pooled, “for the benefit of” (FBO) bank accounts maintained by Synapse’s partner banks for end-users of Synapse’s cus - tomers. When Synapse filed for bankruptcy in April 2024, many end-users were unable to access their funds because the partner banks did not have access to Synapse’s ledgers. After reconstructing transaction data and account balances, there is an alleged shortfall of funds estimated to range from USD65 to USD85 mil - lion. While Synapse’s failure highlighted some of the key risks inherent in FBO account models and bank-fintech partnerships, the responses of the federal banking agencies and industry point towards the future of the industry. After Synapse’s bankruptcy, in July 2024, the federal banking agencies issued a joint statement high - lighting risks and emphasising existing guidance related to arrangements between banks and third parties delivering bank-deposit products and services to end-users, and a broad request for information on arrangements between banks and fintechs. Certain federal banking agencies also issued consent orders against two of Syn - apse’s partner banks (one before and one after Synapse’s bankruptcy), which were focused in part on deficiencies related to the banks’ third- party risk management programmes. These actions indicate the federal banking agencies’ focus on ensuring banks properly manage the risks related to bank-fintech partnerships. The FDIC also issued a proposed recordkeep - ing rule in September 2024. The proposed rule aims to strengthen recordkeeping for “custodial deposit accounts with transactional features” , which are generally defined to include the type of FBO accounts at issue in Synapse’s bankruptcy
and would require banks to have “direct, con- tinuous, and unrestricted access” to the records of beneficial owners maintained by a third party. The proposed rule is not without indus - try pushback, however, where certain industry commentators noted that the proposed rule is too broad and may increase compliance costs and oversight responsibilities of banks without reducing the primary cause of the risks inherent in Synapse’s model. Since finalising the rule will fall to the FDIC as run under Trump’s admin - istration, time will tell if and how the final rule will be implemented. Travis Hill, Acting Chair - man of the FDIC, stated in January 2025 that one of the FDIC’s priorities for the coming weeks and months is to “adopt a more open-minded approach to innovation and technology adop- tion, including... a more transparent approach to fintech partnerships” . Similarly, certain state money transmission regu - lators have increased their focus on unlicensed fintech companies who utilise FBO accounts for customer funds. To the extent these fintech companies still control the movement of money notwithstanding the use of an FBO account model or sponsorship bank, they may be viewed as constructively receiving money for transmis - sion, and, thus, require a money transmission licence. This increased scrutiny over bank-fin - tech partnerships is expected to continue at the state level, even if federal scrutiny eases with the new administration. Conclusion Fintech is evolving rapidly, bringing both oppor - tunities and challenges as regulations shift. The Trump administration’s deregulatory stance has introduced uncertainty, particularly regarding the CFPB’s role in overseeing new financial prod - ucts, while state regulators are expected to take on a larger role. Concurrently, advances in AI-
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