Article

When the sponsoring FI fails, what's next?

Commentary: Marilyn Kilcrease of Creative Card Solutions and Susan Kohl of ThoughtKey Inc. this week wrap up their four-part series on steps ATM deployers should take to protect themselves if and when a sponsoring bank goes under.

March 28, 2010 by Marilyn Kilcrease — President, Creative Card for Prosperity Bank

In 2005 the FDIC published a well-received paper called "Troubled Banks: Why Don't They All Fail?" It attempted to analyze problem banks and determine which ones would fail, be sold or merge, versus those that would successfully recover. The paper is 55 pagesof proofthat no one can predict when a bank will move from being a "problem" to being a failure.

The Series

Evaluating the sponsor bank relationship is critical for ATM deployers: Part 1

Evaluating the sponsor bank relationship is critical for ATM deployers: Part 2

Evaluating the bank relationship is key for ATM deployers: Part 3

But unpredictability is not the only reason the odds are stacking against service providers and ATM deployers trying to avoid sponsor banks that will fail. Frequency is another. As of February 2010, 702 banks were listed on the FDIC's complete list of "problem banks," up from 252 during the same time last year. In 2007, only 76 banks were named on the problem list.

While the list is not public information, many blogs that monitor and track FDIC enforcement actions and call reports provide unofficial listsof "problem banks." Many of these banks will fail, and even worse, many banks not on the official FDIC list will merge or fail so fast that they will never make the list.

If your sponsoring bank fails, learn what actions you can expect the FDIC to take, as well as the 10 most important things you can do to empower yourself to recover.

What to expect from the FDIC

When a bank has failed, typical actions taken by the FDIC include:

Any accounts over the insured limit of $250,000 will be frozen until the FDIC can ascertain what part, if any, of the overage will be available to the accountholder and what part will be held.
Service provider agreements will remain in place and general services will continue, managed by either the FDIC or the new bank.
If a product or service (such as sponsorship, cash vaulting, ACH settlement etc.) has value, the FDIC will attempt to sell the asset to another bank or company, if the assuming bank does not want the product or service.
Contractually, you may have approval rights on "assignments."

Top 10 actions service providers and ATM deployers should take

When your sponsor bank fails and the FDIC takes action, be proactive. It is critical that you make direct contact with the FDIC right away. The service provider's bank liaison will still be at the bank, but this person will not know for sure how your product or service will be handled. That decision rests with the FDIC.

It helps to know that the FDIC representatives will be divided into two groups. The first group manages the transition and any assets not included in the sale. The second group interviews employees to determine if unusual products and services have a value and if the FDIC will sell them or terminate the agreements.

There are many steps you can take to empower yourself during this worst-case situation, including:

Read the FDIC-posted documentation.
If you have a backup sponsor/settlement bank, redirect all activity as soon as possible to the backup bank(s).
Document all discussions with the FDIC and bank; request confirmation of conversations with them in writing.
Contact your bank liaison, and then contact the FDIC. Ask the following: a. Is settlement continuing and are there any issues with your accounts, routing numbers or membership? b. Are all ACH settlements moving and reconciliation completed? c. Are your products and services currently supported by the new bank? d. Will there be any changes to the agreement? e. Are there any new and/or changed fees that you should be aware of? f. Is there a competition issue that must be addressed?
Review your agreement with the bank to ensure you understand your rights.
Contact your liaison weekly for status updates.
If a new bank is assigned, request documentation that confirms they are a member of the necessary card brands you need to conduct business.
Be prepared to provide company information for underwriting similar to what you provided when you where sponsored by your original sponsor bank.
Have your underwriting package ready to ensure a quick transfer of sponsorship.
Seek expertise to help translate any items from the FDIC, bank and/or within your agreement to ensure you fully understand your rights.

Turn catastrophe into opportunity

If your sponsorship must be transferred to a new sponsor bank as a result of a failed bank, Visa will transfer the registration for a $500 fee versus the full registration fee. MasterCard requires a general request from the new sponsor bank, along with a $1,000 fee. Regional networks typically do not charge a transfer fee.

Consider the search for a new sponsor bank as a great opportunity for you to take accountability and responsibility for your success in this troubled economy. Above all, be proactive. Find the financial partner you want with the capabilities you need, and don't settle until you find a partner that understands your business and will be a key contributor to its long-term success.

Marilyn Kilcrease is the president of Creative Card Solutions, a managing partner of ATM ISO CashWorks and the president of CloudCover, a card-processing company. Susan Kohl, CEO of ThoughtKey, contributed to this article. ThoughtKey is a payment-industry consulting firm that focuses on PCI management, regulatory compliance, risk management and expert testimony. To submit a comment about this article, please e-mail the editor, Tracy Kitten.