If deposit products are on your roadmap, now is a good time to start scoping them out.
One of our Flash authors’ Gen Z-aged kids had to move back home from New York City after losing her job due to COVID-19-related layoffs. This good kid concedes she didn’t have the savings to make it through the disruption on her own, and vows never to be in this predicament again. When she’s back out and earning, a deposit account solution using AI to help build emergency and goal-based savings would be a big help to her. We probably all know others in a similar position. Perhaps there is an opportunity here to assist consumers who have learned this lesson but could use a tech-enabled hand to save.
Only banks can hold deposit accounts (checking and savings) and take deposits. However, just like in lending, Fintech companies can partner with banks to offer branded savings and checking accounts with linked debit cards. In these arrangements, Fintech companies can earn a share of the interchange on card transactions and interest payments on the aggregate deposit balance. In arrangements involving debit cards, Fintech companies may also be eligible to receive funds from Visa or MasterCard that may be spent on operating, marketing and growing the debit card program in exchange for exclusively issuing under one of the network’s brands. These network funds are usually paid in the form of a launch bonus and annual volume and growth incentive payments.
Of course, you will have to develop institutional knowledge on deposits before approaching potential bank partners. You can use the checklist below to help ready yourself.
1. Assign a Point Person. Although partner banks will control and oversee deposit program compliance, they will push down day-to-day compliance on the Fintech company and will likely require some deposit expertise on staff. Start building this knowledge now.
2. Become Familiar with the Deposit Laws. There are a handful of major federal laws that apply to deposit accounts, including the Truth in Savings Act and its implementing regulation, Regulation DD; Electronic Fund Transfer Act and its implementing regulation, Regulation E; Expedited Funds Availability Act and its implementing regulation, Regulation CC; and Federal Deposit Insurance Act and its implementing regulations.
The Truth in Savings Act prescribes disclosures that must be made on important deposit account terms to help consumers comparison shop, including fees, annual percentage yield, interest rate and transaction limits.
The Electronic Fund Transfer Act protects consumers making electronic fund transfers, including debit card transactions, bank transfers and P2P transactions, by limiting consumer liability for unauthorized transactions, and prescribing procedures for banks to investigate errors and fraud.
The Expedited Funds Availability Act provides when funds deposited into checking accounts must be made available according to a set time schedule. Although the Expedited Funds Availability Act does not apply to savings accounts, some banks include funds availability provisions in their savings account agreements as a best practice.
The Federal Deposit Insurance Act sets safety and soundness standards for banks, limits on deposit insurance, and recordkeeping requirements that must be met in order for the deposit insurance on custodial or pooled accounts to pass through to the underlying individual owners.
The Consumer Financial Protection Bureau administers the regulations for the Truth in Savings Act and the Electronic Fund Transfer Act and has published examination guidelines for both laws. The Federal Reserve Board is responsible for the Expedited Funds Availability Act’s regulations and has issued a Consumer Compliance Handbook covering the Expedited Funds Availability Act and Regulation CC. These documents highlight areas of compliance interest for each regulator and should be reviewed.
There are a few other authorities you should be aware of. The Fed’s Regulation D contains reserve requirements imposed on banks. The Fed imposes reserve requirements on “transaction accounts,” but not “savings accounts.” A “transaction account” – typically referred to as a checking account – is an account that lets the account holder make transfers and withdrawals by certain convenient methods, such as by check, electronic transfer and debit card. In order to distinguish between a “transaction account” and a “savings account,” the Fed through Regulation D draws the distinction based on how often an account holder can make those convenient transfers and withdrawals out of the account. No more than six transfers or withdrawals may be made by those convenient methods each month out of a savings account. Transaction accounts (e.g., checking accounts with a linked debit card) are not subject to this limit. Many banks also offer money market accounts, sometimes called money market deposit accounts, and these are a type of savings account, so they are also subject to the six-transfer limit.
You should also take stock of the National Automated Clearing House Association (“NACHA”) Operating Rules and Guidelines, which provide rules around ACH transactions, which include electronic payments to and from deposit accounts. These are private rules established by NACHA and do not have the force of law. However, as a condition to sending transactions through the ACH network, a financial institution must agree to comply with the NACHA rules. Also, the NACHA rules require that originators of ACH transactions comply with the NACHA rules, and most banks will require their Fintech partners acting as originators to indemnify them for any non-compliance.
3. Focus on the Disclosure Requirements. Spend more time on the disclosure requirements in Regulation DD, Regulation E and Regulation CC, at 12 CFR § 1030.4, 12 CFR § 1005.7 and 12 CFR §§ 229.10-229.21, respectively. Review the model disclosures provided by each regulation. You will see the model disclosures in the deposit account agreements you review in checking off Number Four (#4) below. The disclosures and model forms spotlight the most important provisions in the regulations.
4. Review Deposit Account Agreements. Read several deposit account agreements on the websites of Fintech companies currently focusing on deposits. Look for the model disclosures. Most partner banks will require that their current deposit account agreements be used for the program, but some precedents may need to be modified by you based on the unique features of your solution.
5. Focus on the Advertising Rules. One of your primary responsibilities will be to market the program deposit accounts. Pay special attention to the advertising rules in Regulation DD at 12 CFR § 1030.8. You will see that if the annual percentage yield is stated in an advertisement, additional disclosures must be made in the advertisement. In your bank partnership arrangement, you will develop all advertising materials and submit them to the bank for approval. Your bank partner will require you to have a marketing policy covering the advertising rules in Regulation DD, as well as more general rules against deceptive advertising.
6. Review Future Competitors’ Advertisements. Check out other Fintechs’ advertisements and website promotions and how they handle compliance.
7. Focus on the Statement Rules. You will also have administrative responsibilities in connection with the program deposit accounts, including developing and providing on behalf of the bank partner monthly statements. Regulation DD and Regulation E contain specific requirements for statements at 12 CFR § 1030.6 and 12 CFR § 1005.9, respectively.
8. Error Resolution. The error resolution rules in Regulation E at 12 CFR § 1005.11 are presently an area of scrutiny among federal banking agencies examining Fintech-bank deposit partnerships. These rules define what constitutes an “error” (e.g., unauthorized or incorrect electronic payments) and the procedures that must be followed to resolve alleged errors asserted by account holders. You will see that these procedures are onerous. You will be responsible for handling error resolution, subject to bank oversight and control. Your bank partner will require you to have error resolution and fraud prevention policies. You will also be generally required to cover losses for unauthorized transactions and fraud. The program agreement you enter into with your bank partner will call for you to maintain a reserve account with the bank partner that can be drawn on to cover these losses.
9. Overdrafts. How overdrafts are handled is also an area of interest to the federal banking agencies, and, as a result, requires particular attention. Regulation E at 12 CFR § 1005.17 includes requirements for overdraft services under which fees are charged for paying transactions when the consumer has insufficient or unavailable funds in her account. Fintech-bank deposit partnerships have been innovating on overdrafts, developing, for example, balance buffer features and not charging fees for overdrafts paid within the buffer amount. If your solution includes an overdraft solution, your bank partner will require you to have an overdraft policy.
10. Begin Drafting Policies and Procedures. Bank partners will require that a slate of written policies and procedures be implemented before launching the deposit program, including policies and procedures on: error resolution, fraud prevention, marketing, overdrafts, compliance management, electronic signatures and disclosures, AML/KYC, social media, complaint management, garnishment, escheatment, privacy, information security, vendor management, the federal laws identified in Number One (#1) above, and other applicable laws, including the Fair Credit Reporting Act if consumer reports are used in opening accounts, Telephone Consumer Protection Act, CAN-SPAM Act, Americans with Disabilities Act, and unfair, deceptive or abusive acts or practices.
11. Identify Potential Bank Partners. You can begin to identify potential deposit bank partners by researching Fintech companies that are currently in bank partnerships offering deposit products. These companies’ websites should clearly identify the bank they are partnering with. Often, you’ll see a disclosure at the bottom of each relevant webpage indicating “banking services provided by ABC Bank” and links to the bank’s deposit account agreement on the “legal” or “disclosures” webpage.
Our Fintech Team
Goodwin’s Fintech team has over 150 lawyers practicing in every Fintech vertical, including lending, alternative lending (e.g., factoring, merchant cash advances, income share agreements, home equity appreciation products), deposits, payments, digital currency and blockchain, wealth management, bank partnerships and charters, and transactions.
Kimberly Monty HolzelPartner
Alexander J. CallenPartner