Despite recent efforts to update state unclaimed property laws to account for advances in technology, state unclaimed property laws have not been able to keep pace with the FinTech industry’s rapid growth. Because of this disparity, many companies that operate in the FinTech industry find it difficult to maintain compliance with the various laws and regulations, or are unsure how these laws apply to their unique business practices.
In this article, we’ve highlighted two case studies that shed light on some of the risks and challenges associated with unclaimed property, along with the measures that were introduced to ensure compliance with state laws.
Additionally, we’ve outlined unclaimed property best practices to help keep FinTech companies on the correct path to compliance.
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FinTech Case Study #1: Lack of Traditional Dormancy Triggers
Our first company operates within the lending sector of the FinTech industry and provides a platform that brings together those that are seeking short-term loans with those seeking to diversify their investment portfolios through the funding of such loans.
Unclaimed Property Considerations
The unclaimed property considerations for the borrowers are straightforward in that the potential overpayment of the loan balances could create a credit balance due back to the borrowers. Banks and other types of institutions that provide loans are accustomed to handling this type of activity.
Unclaimed property considerations for the investors are a bit more complicated. The investors typically purchase shares of the loan in $50 increments, so they’re not backing the entire loan amount, and spread their investment across several loans with varying maturity dates. As borrowers repay their loans, funds are distributed to the investors.
Most investors set up their accounts to auto reinvest funds that are received in the form of the payments, and they get auto reinvested into new loans with new maturity dates. This creates a rolling effect of the maturity dates and the amounts that are coming in; so one firm maturity date on these loan repayments never really exists.
Historically, states have not addressed investment accounts of this nature, therefore trigger dates have not been defined. By trigger dates, we refer to what point in time the state dormancy clock starts to run.
Due to the nature of the FinTech industry, 99% of the transactions that are conducted are electronic – including client communications and funds distribution. There is very little in the form of paper checks, and there is little to no traditional mail.
Companies within or related to the financial services sector will recognize that non-cashing of a check, inactivity on an account, loss designation of an account owner, and mail returned from the post office (RPO) are key triggers for states to identify accounts that could become potentially escheatable.
Without the non-cashing of checks and without the non-return of mail, most of those triggers are very difficult to identify.
Unclaimed Property Response
To proactively address considerations related to potential unclaimed property, this particular company conducted an internal review of their procedures and implemented internal controls to capture owner initiated activities across all systems and identify those accounts at risk of being considered inactive.
Additional protocols were established to encourage account owners to periodically log into their accounts online via user name and password to confirm knowledge of the account.
The company also implemented an aggressive communication protocol that helped to ensure ongoing contact with account owners including provisions for bounced emails and electronic funds transfers, which is key within the FinTech industry because that’s how they communicate with their account owners.
Bounced emails and the non-delivery of electronic funds would trigger traditional mail outreach and paper checks, which is highly unusual for the FinTech industry. If the electronic fund transfers could not be successfully delivered, the company then reverted to a paper check which is then tracked for unclaimed property provisions.
Finally, the company reviewed and updated account owner contracts. This helped to clearly define account owner responsibilities and the steps that they would take in the event an account is deemed to be inactive or lost.
Fintech Case Study #2: Determining the True Holder
This second company provides a platform that brings together companies seeking artistic support services such as graphic art, and printing, or computer design with those that provide these types of services.
The FinTech firm acts as a conduit between the two parties to facilitate the payment of services. The companies requesting services and the service providers can also elect to create accounts with the FinTech to help manage ongoing relationships, so there is a possibility for aged accounts to exist.
The challenge facing the FinTech company is the identification of transaction that represent potential unclaimed properties held by the FinTech, versus transactions that may be due between the requesting company and the service providers for which the funds were never received.
The FinTech faced additional challenges maintaining contact with the service providers due to the transient nature of the artists providing the services. They changed addresses frequently and did not feel the need to have to provide their mailing address.
Unclaimed Property Concerns
To address these concerns the FinTech company established strong internal accounting systems that clearly identify transactions for which the funds were received and held by the FinTech versus those for which the monies were owed but were never provided by one party or the other, so the FinTech is not considered the holder of the funds.
Unclaimed Property Response
The FinTech firm implemented ongoing maintenance and monitoring of the accounts of both sides of the transaction to identify potentially inactive accounts and undistributed balances, which would then trigger aggressive outreach communication protocols, so that contact can be made and the funds can be reunited to the rightful payee.
Furthermore, the FinTech now requires complete mailing addresses for all client companies, service providers, and users before allowing them to become active on the platform.
Finally, all user agreements included provisions detailing account owner responsibilities and steps to be taken once an account is deemed lost or inactive.
Unclaimed Property Best Practices for the FinTech Industry
Companies in the FinTech industry can take proactive measures to ensure that unclaimed property exposures are being addressed and handled appropriately.
Companies can and should employ several best practices that would help them to stay in compliance with the state unclaimed property provisions, while also protecting client accounts from being considered inactive prematurely.
Below are best practices for FinTech companies to keep in compliance with unclaimed property laws in each jurisdiction.
Collect Mailing Addresses for Communication Protocol and Outreach Efforts
Companies should establish strong communication protocols. Since the FinTech industry is highly reliant on technology, steps should be taken to record email bounce backs in addition to the use of traditional mail.
Since most communications are conducted through email, it is extremely important to have a fallback procedure in place in the event that email cannot be delivered.
FinTech companies should also require using complete mailing addresses for all platform users. While this may not seem necessary to the user, due to the primary use of electronic communications, in the event that something becomes unclaimed, the complete addresses would help ensure that the properties are reported to the correct state. It also goes a long way in helping users or payees collect their funds from the state at a future point in time.
If a mailing address is not provided, and the property is reported to the state of incorporation, what is the likelihood of that payee ever being reunited with the funds that they are entitled to? The chances are greatly diminished.
Define Owner Activity
FinTech companies should also clearly define account owner activity rules within their user agreements, so that users are aware that they need to remain in contact with their account.
It is good practice to require users to log into accounts annually, or at least every other year, by username and password to confirm knowledge of the account.
Companies should also include steps to be taken in the event that the financial distributions cannot be completed electronically. In the event that an EFT bounces back, switching to paper checks should be utilized after a certain amount of failed deliveries for easier tracking of unclaimed property.
Implement Strong Internal Controls
Strong internal controls and accounting systems need to be reviewed and tested to verify that they clearly identify the funds received and owed to an outside party, versus those that are owed but never received.
It is imperative to make sure that accounting systems clearly identify when your company holds the funds and when those funds are due to another party.
It is also important for internal systems to communicate with each other in order to document all instances of owner-initiated contact and be properly considered active. It is common for FinTech companies to have multiple systems that capture, generate, or communicate in some way to the users and its client companies.
Those different actions or systems need to communicate with each other to place information into a centralized system, so that a current date of last contact can be maintained for all of account users.
Keeping up to date with owner-initiated contact is key in identifying those that are considered to be inactive. This allows FinTech companies to be able to preserve the account or distribute funds out to the rightful owner.
Document all Communication with Owners
Companies should establish their unclaimed property policies and procedures in writing to ensure that the proper steps are taken in the event that an account becomes inactive, lost, or undeliverable.
Steps should be taken to educate everyone within the organization that could have an impact on the documentation of follow-ups, needed to properly track and identify at risk accounts and distributions.
It is extremely important to make sure that everybody within your organization understands the implications of not documenting communications. If those types of communications are not captured, they can be challenged at a future date by an auditor.
These communications may be difficult to pull at a later date, and therefore an account owner who was recently in contact with the organization may then be inadvertently considered inactive because a date wasn’t updated.
Start the Due Diligence Process Early in the Cycle
All states require due diligence mailings to be sent out to the property owners. Due to the nature of the FinTech industry, where the procedures for traditional mail are used more sparingly, it is key that the due diligence process is started early in the escheat reporting cycle.
Sending late is not something that FinTech companies, or any company for that matter, want to approach right before the filing deadline. Due diligence mailings and outreach efforts are parts of the unclaimed property reporting process that should be addressed ahead of time.
Employ Traditional Unclaimed Property Reporting Best Practices
Traditional best practices may also be recommended based on the activities of FinTech companies. There are many different industries that are now active in the FinTech sector, and it is important to take into consideration all 55 sets of unclaimed property laws and regulations.
As the Fintech industry continues to grow, so will its unclaimed property implications. It is important to stay ahead of varying state escheat laws to ensure compliance for your organization.