Unsafe and Unsound Banking Practices: Brokered Deposits — Financial Innovation Now (May 18, 2020)

Summary

Comment letter dated May 18, 2020 from Financial Innovation Now (FIN) to Jelena McWilliams, Chairman of the Federal Deposit Insurance Corporation, on RIN 3064–AE94, the FDIC's notice of proposed rulemaking on brokered deposits restrictions. FIN describes itself as an alliance of technology innovators and states that the proposed changes to the deposit broker definition would create barriers to innovation. In place of the FDIC's proposed four categories of facilitation activities, which it calls overly expansive, FIN proposes a three-part framework for who should be excluded from the definition. The signature block names Brian Peters, Executive Director of Financial Innovation Now.

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May 18, 2020

The Honorable Jelena McWilliams
Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429

Via Email: comments@fdic.gov

Re:    RIN 3064–AE94 Unsafe and Unsound Banking Practices: Brokered Deposits
Restrictions - Notice of Proposed Rulemaking and Request for Comment (“NPR”)

Dear Chairman McWilliams:

Financial Innovation Now (“FIN”) appreciates the opportunity to provide comment on the
NPR and applauds the FDIC’s stated intent to “modernize its brokered deposit regulations to
reflect recent technological changes and innovations that have occurred.”1 FIN is an alliance
of technology innovators promoting policies that empower technology to make financial
services more accessible, safe and affordable.2

FIN believes the proposed changes to the “deposit broker” definition, if implemented, would
create barriers to innovation. FIN proposes for the FDIC’s consideration an alternate
framework that updates the scope of the “deposit broker” definition to account for
technology’s impact on today’s banking landscape and acknowledges the varied purposes that
third party technology service providers have in collaborating with banks, which should fall
outside brokered deposit regulations.

In lieu of the FDIC’s proposed four categories of activities to determine whether a person or
entity would meet the “facilitation” prong of the “deposit broker” definition (where we
believe each such proposed category is overly expansive and would have the unintended
effect of covering a vast expanse of third parties who are not facilitating the placement of
deposits), FIN proposes a three-part framework to clarify who should be excluded from the
“deposit broker” definition.

1
  FDIC Notice of Proposed Rulemaking and Request for Comment (“NPR”), Unsafe and Unsound Banking Practices:
Brokered Deposits Restrictions, Fed. Reg. Vol. 86, No. 27, p. 7453, available at
https://www.fdic.gov/news/board/2019/2019-12-12-notice-dis-b-fr.pdf.
2
  Our member companies include Amazon, Apple, Google, Intuit, PayPal, Square, and Stripe. For more information
regarding FIN’s policy priorities and principles, please visit https://financialinnovationnow.org


    Financial Innovation Now | https://financialinnovationnow.org | 1155 F Street NW - Suite 900, Washington, DC 20004   1
Companies that provide services to depositors over the internet should not be regarded as
deposit brokers if:

              1. The choice of depository institutions is that of the depositor;
              2. The depositor holds the accounts directly in the depositor’s name; and
              3. The fees the service provider receives from depository institutions are
                 unrelated to deposit volume or the number of deposit accounts opened by
                 depositors.

This approach would ensure that such third parties, when providing various services to
depositors, would remain passive entities vis-a-vis any deposits placed at depository
institutions. The fee structure limitation in (3) above would further ensure that such third party
service providers would not have any stake in facilitating the placement of deposits as their
fees would be tied to a separate primary purpose.

Addressing Question 3 of the NPR, we believe that the four categories of activities falling
under “facilitating the placement of deposits” are too broad; particularly the first category,
encompassing any person that “directly or indirectly shares any third party information with
the insured depository institution” (emphasis added). A different framework for determining
who should be considered a “deposit broker” is needed. We believe the FDIC should look to
its current interpretations for listing service providers, which permit listing services to serve
as a communications link between depositors and insured depository institutions.3

The NPR’s overly broad expansion of the definition of “deposit broker” subsequently requires
that many exceptions should be made and specified, lest all parties that insured depository
institutions (“IDIs”) do any type of business with be considered a deposit broker. The NPR
does propose various categories and bright-line tests under which a person or entity may
qualify for an exception to the deposit broker classification, but as a comprehensive listing of
exceptions to such an expansive definition would hardly be possible, the NPR ultimately
defaults to requiring a case-by-case determination for all exceptions.

In both substance and process, the NPR would create a more restrictive and burdensome
regulatory framework for determining which deposits should be considered brokered deposits.
Requiring an individual application process for third parties whose activities have a primary
purpose outside the scope of the deposit broker definition would substantially slow innovation
and hinder collaborative efforts between banks and technology companies. If any such
application process is ultimately instituted, FIN strongly believes that such a burdensome and
costly application review should be limited to third parties that facilitate bulk movements of
deposits (which have been noted by the FDIC as riskier4 and reflect the types of brokered



3
  FDIC Study on Core and Brokered Deposits, Submitted to Congress pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act, July 8, 2011, at p. 20, available at https://www.fdic.gov/regulations/reform/coredeposit-study.pdf
(citing Advisory Opinion No. 04-04).
4
  Id. at 50.


    Financial Innovation Now | https://financialinnovationnow.org | 1155 F Street NW - Suite 900, Washington, DC 20004        2
deposit transactions that contributed to failures of banks and savings associations in the late
70s and 80s).

FIN’s proposed three-part test, by contrast, provides a straightforward framework for applying
an exception that would not require a case-by-case evaluation by the FDIC as industry
participants could clearly determine whether such test applies to any third party partnership.
This clarity would encourage collaboration between IDIs and third party service providers
whose primary purpose is not to facilitate the placement of deposits at IDIs, but rather, for
example, to improve the efficiency of the financial system or provide a broader range of
financial education, management or other services to customers. Ultimately, we believe that
FIN’s proposed three-part test will encourage innovation in the ecosystem thereby supporting
the FDIC’s stated goal in this regard.


                                                                                 Respectfully,



                                                                                 Brian Peters
                                                                                 Executive Director
                                                                                 Financial Innovation Now




   Financial Innovation Now | https://financialinnovationnow.org | 1155 F Street NW - Suite 900, Washington, DC 20004   3


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