Warren, Senators Fight Back Against Fintech Firms Freezing Customer Funds

September 12, 2024

Warren, Senators Fight Back Against Fintech Firms Freezing Customer Funds

"The rapid growth of these partnerships risks harming consumers while posing a broader threat to the stability of our banking system and the economy."

Text of Letter (PDF)

Washington, D.C. - U.S. Senators Elizabeth Warren (D-Mass.) and Chris Van Hollen (D-Md.) wrote to the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System (Fed), and the Office of the Comptroller of the Currency (OCC) raising concerns about partnerships between traditional banks, Banking as a Service (BaaS) providers such as Stripe, Finastra, Synapse, and Marqueta, and financial technology (fintech) entities such as Venmo, CashApp, Yotta, and Chime. These entities have come under intense scrutiny following the failure of Synapse, which hurt over 100,000 consumers with $265 million in deposits.

"The rapid growth of these partnerships risks harming consumers while posing a broader threat to the stability of our banking system and the economy," wrote the senators.

BaaS revenue alone is expected to rise from $1.7 billion in 2021 to over $17.3 billion in 2026. Synapse Financial (Synapse), one such entity, operated as an intermediary between fintech companies and regulated banks, helping to transfer consumer funds from apps to banks. After Synapse's failure, $265 million in customer deposits were inaccessible for months, and more than $95 million is still unaccounted for. Regulators today rely on partner banks to regulate their fintech and BaaS partners-but this self-regulatory approach is not working. Synapse's failure is just the most recent example of the harm posed by the lack of oversight of BasS providers and fintech companies.

Senators Warren and Van Hollen raised concerns about BaaS and fintech providers misleading consumers about the availability of federal deposit insurance for their funds, despite the fact that "consumer deposits are not protected when in transit to the bank or if any associated fintech or BaaS provider declares bankruptcy." The FDIC has the authority to address these misleading claims, and the senators asked the agency to act to address risks to consumers.

"You possess clear statutory authority to regulate service providers directly. In the immediate term, given the threat posed to consumer deposits by the safety and soundness vulnerabilities of BaaS and fintech companies, we urge you to use your existing authority under the Bank Service Company Act and the Federal Deposit Insurance Act" to directly supervise and examine these entities and address these threats," the senators continued.

The Senators made two specific asks of the regulators: 1) Ban the use of the FDIC name or logo for companies that provide products only eligible for pass-through FDIC insurance, and 2) Directly supervise and examine these entities under the Bank Service Company Act to ensure compliance and conduct enforcement actions against companies that violate these established rules.

Senator Warren has been a strong advocate in oversight for novel issues in the financial industry:

• In December 2023, Senator Warren led 91 lawmakers in a letter to the Consumer Financial Protection Bureau (CFPB), asking it to protect consumers by conducting a rulemaking on forced arbitration for financial products and services.
• In September 2023, at a hearing of the Senate Committee on Banking, Housing, and Urban Affairs, Senator Warren praised the CFPB for taking action to address risks posed by artificial intelligence in financial services, such as lenders using A.I. to produce biased home appraisals or banks using A.I.-powered chatbots that may give consumers misleading financial information.
• In July 2023, at a hearing of the Senate Banking, Housing, and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, Senator Warren blasted big banks' use of predatory overdraft fees and called on the CFPB to continue its oversight of these giant banks.
• In June 2023, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren applauded the CFPB's proposed rule to cap unreasonable credit card late fees, which could save working families billions of dollars each year.
• In December 2022, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren highlighted the CFPB's achievements over the previous year to hold big banks and giant corporations accountable and put money back in working families' pockets.
• In December 2022, Senator Warren sent a letter to Early Warning Services (EWS), the parent company of big bank-owned peer-to-peer payment platform Zelle, questioning EWS about upcoming changes to its fraud policy on Zelle, including changes to its liability policies and refunds for customers who were scammed, and requesting a full briefing about these changes.
• In November 2022, Senator Warren sent letters to Wells Fargo and EWS, criticizing both companies' responses to her report as misleading and false, and called on them to release all data on fraud and scams on Zelle to back up their rhetoric disputing her findings.
• In October 2022, Senator Warren sent a letter to the Consumer Financial Protection Bureau, summarizing the findings of her investigation revealing high rates of fraud and scams on Zelle and that the banks are not refunding the vast majority of defrauded consumers, breaking their promises to their customers and potentially violating federal law.
• In July 2022, Senators Warren, Bob Menendez (D-N.J.), and Jack Reed (D-R.I.) sent letters to each of the banks that own EWS, requesting information about the Zelle scams and frauds its customers have reported to them. With the exception of Truist, the relevant banks testifying provided little to none of the information the lawmakers requested, until Senators Warren and Menendez again pressed bank CEOs for this information at the September BHUA Committee hearing.
• In April 2022, Senators Warren, Menendez, and Reed sent a letter to EWS, asking the company to disclose how many reports of fraud it had received from users since the beginning of 2018. Early Warning Services provided little data on the volume of fraudulent transactions occurring on Zelle.

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