FDIC Guidance on Brokered Deposits Affects Many Prepaid Issuers

March 6, 2015
By: Stephen Kiene and Jake MacMichael

On December 24th, 2014, the FDIC released “Guidance on Identifying, Accepting, and Reporting Brokered Deposits.” These FAQs clarified that most prepaid funds should be classified by prepaid issuers and BIN sponsors as brokered deposits, including nearly all funds facilitated through third-party program managers or retail partnerships. The FDIC took a broad interpretation of “brokered deposits” and “deposit brokers,” defining the latter as any person or company that places or facilitates the placement of a third party’s deposits with an insured depository institution, including the parent or affiliate of that institution.

Effective immediately, most prepaid issuers must be classified as “well capitalized” by the FDIC in order to accept or hold brokered deposits (see Table 1). Any financial institution that falls below that standard but is still classified as “adequately capitalized” could obtain a waiver to continue to hold brokered deposits, but these waivers are rarely granted and must be renewed regularly. Finally, even well-capitalized banks may now be subject to increased insurance assessments (up to 10 basis points) if brokered deposits constitute more than 10% of total domestic deposits.

Table 1: Capital and Liquidity Classifications (Federal Deposit Insurance Act)
Table-1_-Capital-and-Liquidity-ClassificationsSource: Section 38 of the Federal Deposit Insurance Act.

While this new interpretation of brokered deposits will likely have minimal impact on banks that focus on prepaid as a relationship product, the FDIC Guidance has a number of direct implications for prepaid specialists and industry dynamics more broadly, including:

  • Higher FDIC insurance fees. Some prepaid specialist issuers will now be subject higher fees for FDIC insurance, and even well-capitalized issuers will be under enhanced regulatory scrutiny for their brokered prepaid deposits.
  • Increased Emphasis on Capitalization Designations. Moving forward, issuer capitalization designations will be even more important in maintaining viability as a prepaid issuer and as a partner for large prepaid program managers (PMs).
  • Changing Competitive Dynamics. If specialist issuing partners pass through higher costs to their non-bank PMs, it could help narrow the pricing gap between large, Durbin-regulated bank programs and non-bank program managers who typically rely on Durbin-exempt specialist bank sponsors.

Following the announcement in December, the two largest U.S. prepaid issuers by dollar volume (Bancorp and Metabank) made comments related to the new FDIC guidance as part of their quarterly earnings releases in January. Both banks indicated that they have re-categorized some prepaid deposits as brokered deposits but that the changes will have no material negative impacts on their financial condition.

While that may be the case, bank sponsors of third party programs can now expect a much closer look from their regulators. If nothing else the FDIC guidance illustrates how federal regulatory agencies are pursuing new ways to regulate non-bank financial services and increasing their scrutiny of banks that facilitate financial services activities for non-bank partners. In a broader sense, this move continues a pattern of increased oversight and regulation of the prepaid sector that may have long-term implications.

For more information, please contact Stephen Kiene, Senior Consultant, stephen.kiene@firstannapolis.com; or Jake MacMichael, Analyst, jake.macmichael@firstannapolis.com. Both are members of the Deposit Access Practice, specializing in Debit and Prepaid.