False Marketing Language For FDIC Can Lead To Big Headaches
There wasn’t much for me to do over the weekend besides rewatch Billions and read some new research reports (sidenote: I tweeted this about how the peak for neobanks was when it became a major plot point in Billions…it’s so unrealistic. I’m sure 99% of hedge funds don’t give a shit about building a neobank. Who gave them this idea? I have so many questions.)
When the Voyager Digital debacle was underway in early July, partner bank Metropolitan Commercial Bank released a statement essentially saying that Voyager customers were only covered through FDIC Insurance if the bank itself failed, not Voyager.
Except if you were a customer that happens to go on Voyager’s website, it certainly seems like they have FDIC insurance. In fact, there’s still a webpage up that literally says they do for USD deposits. The confusing language led the FDIC to investigating Voyager to see if it violated any rules around FDIC insurance marketing.
Marketing violations like this are akin to an unforced error—this was definitely on Voyager to accurate explain how FDIC insurance worked, and they definitely exaggerated it to customers. Why? Maybe the company was unaware that omnibus accounts, which Voyager had with Metropolitan Commercial Bank, weren’t the same as a banking–as-a-service relationship. Perhaps they wanted customers to have the sense of security of FDIC insurance, but without going all the way of becoming a neobank. I’m just guessing here—I frankly have no idea. But, to me, it’s clearly a violation and one that adds another headache for Voyager as the company tries to figure out if how to navigate Chapter 11 (in the most recent Voyager news, their bankruptcy lawyers criticized FTX for putting forth a “lowball” offer, which is a bit absurd since the company’s literally bankrupt. Did these lawyers expect to sell at a premium? FTX’s CEO SBF fired back by saying the lawyers are trying to rack up fees—come at the king. you best not miss.)
So when I came across a new report from law firm Davis Polk, which says that fintech companies could be next on the FDIC’s horizon, I perked up. The note, which you can read here, had a lot of information that I think is critical for operators and marketers in fintech companies touting FDIC insurance.
There’s been a statute in the FDI Act since 2008 that essentially states you coulndn’t market FDIC insurance if your business isn’t FDIC insured. The statute lets the FDIC and other federal banking agencies bring actions against companies but that’s it. On July 5th, a new rule was effected that made violations a bit more broader than explicitly saying FDIC insurance but also covers suggestions and implications (this is important I swear.) This gives the FDIC—which in this case acts as the enforcement agency for non-bank fintech companies—a larger purview and a wider potential of violations too. And while this initially wasn’t a big deal for fintech companies, according to Davis Polk, Voyager’s issue with FDIC marketing has put both crypto companies and fintech firms in the forefront.
The other alarming thing I learned from the David Polk note was that, in 2019 and 2020, there have been at least 165 informal actions against companies that have falsely used FDIC insurance language or logos. That’s way more than I assumed. Because these actions are non-public and confidential, we have no way of knowing which companies were in violation. But I’d be willing to bet that a couple fintech companies may have crossed the line here.
The FDIC is also created a new process for people or businesses to whistleblow on one another when they see violations that the FDIC may not have caught, will make it harder and harder for violations to fly under the radar. As Davis Polk writes, “The rule, which arguably expands the scope of some prohibitions of the statute, and the agency’s statement that it believes the rule will primarily affect non-bank entities, are all signs that fintechs with bank partnerships may be targets of the FDIC.”
For both crypto and fintech companies, marketing language is something to be very acutely aware of; there are so many companies that get tripped up and have to pay hefty fines because of a few words that are misplaced. When it comes to FDIC insurance, it might make sense for you to get a letter from your sponsor bank ensuring that your customer’s funds are FDIC insured, just in case (even going to your banking-as-a-service provider won’t be enough, since they don’t own the underlying charter.) As usual when building in fintech or crypto—it’s way better to be safe than sorry.