FDIC Leaves All Fintech Users Unprotected in Regulatory Blindspot! (Too Small to Care?)

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I’ve been traveling internationally for the last couple of weeks, and with all the chaos of trying not to lose any of the kids on whatever multi-transfer subway ride or hiking trail is on the agenda every day, I felt quite relieved that my finances were so low-maintenance. Buy-and-hold means I don’t need to check stock market quotes, I pay all my bills online once a month for 10 minutes, and I have enough cash cushion so I don’t stress about daily cashflow (matching up payday timing with expenses).

Unfortunately, for the folks that put their day-to-day cash in the “checking accounts” of fintechs like Juno and Yotta, the past few weeks have been the opposite. Their cash is frozen in limbo, with a bankrupt Synapse (Banking-as-a-Service provider) rapidly winding down and shedding all of their employees while pointing the fingers at everyone else.

Roughly $85 million in user deposits is unaccounted for. The ledger of transactions and balances does not match up between Synapse and Evolve. The bankruptcy judge apparently has very little power (and no money) and has resorted to asking for a private forensic accounting firm to help out “pro bono”. Given the possibility of theft there, I think potential jail time should be on the table, personally. Jason Mikula of Fintech Business Weekly is still the best source track new developments.

To be clear, the users of Yotta and Juno had ABA routing numbers and account numbers from Evolve Trust & Bank. Users could very well be forgiven for assuming that they had “direct” or demand deposit accounts (DDA) accounts at Evolve Trust & Bank.

The FDIC has maintained their stance that this is not a bank failure, and thus not their responsibility to help. Instead, they just quietly updated their website with some “helpful” Consumer News:

Increasingly, some consumers are choosing to open accounts through nonbank companies (typically online or through mobile apps), such as technology companies providing financial services (often referred to as fintech companies), that may or may not have business relationships with banks. If and how a bank is involved is key to understanding whether or not your money is protected by deposit insurance. However, in some cases, it is not always clear to consumers if they are dealing directly with an FDIC-insured bank or with a nonbank company.

[…] However, FDIC deposit insurance does not protect against the insolvency or bankruptcy of a nonbank company. In such cases, while consumers may be able to recover some or all of their funds through an insolvency or bankruptcy proceeding, often handled by a court, such recovery may take some time. As a result, you may want to be particularly careful about where you place your funds, especially money that you rely on to meet your regular day-to-day living expenses.

This is clearly a huge regulatory blind spot. The FDIC (along with other regulators) has publicly allowed millions of individuals to open up accounts at this companies which promote “banking” services, “savings accounts”, “checking accounts”, and most importantly ‘FDIC-insurance”. The FDIC has allowed this advertising to happen for years and years. Everyday consumers clearly believed that their money is “safe” and FDIC-insured. Why wouldn’t they? The system benefited from the addition of billions of dollars in deposits into partner banks. Many of these customers are the previously “unbanked” and “underbanked”.

Chime has over 20 million customers and over $6 billion in deposits. You think all those people know that they could instantly lose access to their money for months? You think they know they could experience permanent financial loss if Chime doesn’t track everything perfectly?

I truly believed that some regulatory agency, perhaps the Consumer Financial Protection Bureau (CFPB) in collaboration with the FDIC, would step in to close up this blind spot. The Federal Trade Commission. The Federal Reserve. But instead, everyone has backed away. In my opinion, this is a case of many small individual consumers being ignored. If this was a bigger story, if there was more political pressure from a single powerful person or company, I believe some positive action would have occurred.

Instead, fintechs are essentially sent back to the age of the Great Depression, before there was FDIC insurance and you never knew if your bank would fail and your money would disappear. How is the individual consumer supposed to know if their fintech is properly reconciling every single transaction? If a company can simply lose $85 million of user deposits that were marketed as “checking accounts” with “FDIC insurance” and not have any repercussions because they declared bankruptcy, then this is the Wild West again. What does it matter if pass-through FDIC insurance exists, if a simple addition or subtraction reconciliation error from the company can negate it?

The following quote is credited to John Maynard Keynes when questioned about changing his stance (long backstory):

When the facts change, I change my mind – what do you do, sir?

Well, I’ve changed my mind. The FDIC has allowed misleading marketing for years, all while the member banks have profited from fintech deposits. Yet it won’t protect the affected everyday consumer. I will no longer trust any fintech with my money for longer than it takes to grab a quick sign-up bonus. I’ll probably avoid any sort of deposit bonus that requires a longer hold period. In my opinion, even the silence from other fintechs has been disappointing. This event stains them all. I will no longer maintain any significant balance at a fintech.

Dig deeper into the weeds here, here, and here.

Photo by Jeremy Bishop on Unsplash

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  1. Do you know if this would apply to Raisin accounts as well as far as the FDIC “blind spot”?

    • Yes, I consider Raisin a fintech as they use FBO accounts like other fintechs. Raisin tries to stay separate and cleaner (no debit card processing, for example), but in the end they are still in this blindspot right now.

  2. Steven Wagner says

    Is Ally considered fintech?

  3. Would you consider sofi a fintech?

    • SoFi used to be a fintech, but they bought themselves a real bank and now SoFi Bank is a nationally chartered bank with their own FDIC insurance certificate. They are no longer a fintech.

  4. Lets not just guarantee Fintechs, lets forgive all student loans, lets banish medical bills from people’s credit reports, lets raise the minimum wage to $20/hour, lets give illegal aliens Welfare and Food Stamps, lets put a transgender bathroom on every corner in America. Let’s move every person in the Gaza Strip to Florida and give them a free condo. Anything else you want the 50% of taxpayers that actual pay taxes to pay for?

    • canoeguy1 says

      I would suggest spending 30 seconds and googling how FDIC insurance works, and who pays for it, before making a fool of yourself with statements like that.

    • It’s funny how every example listed, no matter how ignorant and wrong, is basically “let’s make people’s quality of life better” and you’re so mad at that. Touch some grass, brother.

    • FDIC insurance has been quite successful because it removes the risk that an everyday saver will lose all of their savings due to the bad behavior of a single bank, the risk of which the everyday saver has little ability to assess. Yet the FDIC receives no government funding. It is funded by assessments on the banks themselves. It is backed by the government, which means it is implicitly backed by the taxpayers. I don’t see why fintechs should not participate in this successful system. There is a reason why it was invented, yet here we are again, re-learning the lessons.

    • Is this really the best place for your angry and ill-informed political screeds?

  5. canoeguy1 says

    I haven’t seen much value in Fintechs for a while, besides the initial bonus. Nor banks, for that matter. US Treasuries provide the same interest rate as CD’s at the moment, and they’re insured by the US government. No worries about fintech or bank failures, and whether or not the FDIC has the will or money to actually back up the guarantee. I put a lot of my money into TIPS (Treasury Inflation Protected Securities) which were recently providing a real yield of 2.35% for a 30 year bond (approx 5.75% current total yield given today’s inflation). The money is as safe as it gets, AND it’s protected from inflation for the long term.

    • canoeguy1 says

      One more thing to add: By investing in long-term Treasury bonds with a low coupon rate, you can defer federal taxes on almost half of the interest till the bond matures or you sell it. And there is no state tax on Treasuries. This is another big benefit of Treasuries that CD’s don’t provide. Just no reason to invest in fintechs these days. The desperation days of 2021-2022, when you had to scrounge for every 0.1% interest by investing in risky startups are long gone.

  6. paul gipson says

    The FDIC probably isn’t the right agency to regulate fintech type operations; maybe the FTC. But the trend in federal (and some state) courts right now is to lessen the power of regulatory agencies. There are some that are working to elect a government that would rollback the regulatory power of agencies like the SEC, FTC and FDA. Many would like to eliminate the FDIC altogether. There is definitely a segment of our financial and political society that would favor a return to the regulatory environment as it was before the Depression. And they are working hard to achieve that goal.

  7. Related, yet slightly off target as the reason is more nefarious than a vendor going bust – Anyone else lost money locked in a non-recoverable Bitmo account?

    Rumor has it the owners swiped all the funds, closed shop on a dime (office, url, website, contact info etc all disabled at the same time.) Anlther rumor states the development team shifted efforts now to bitcoin products

    We have a little north of 3k to our Bitmo account in various Airbnb, restaurant and related gift cards. I was luck enough to get a pulse check shortly before they boarded up the doors.

    See Reddit for additional info.

  8. Michael Anderson says

    It seems like many of the fintechs are trying to save money and regulation by not becoming chartered banks (with FDIC insurance). If they don’t want to contribute to the FDIC, then we shouldn’t expect them to be bailed out by the FDIC.
    I’m not victim-blaming because how could individual investors know the fintechs were misleading people about their FDIC coverage. Your point that the FDIC and/or the CFPB should have come after the fintechs for falsely suggesting they have FDIC coverage is spot on!

  9. Money Blog Fan says

    I have a possibly related question. What about the outside providers that credit unions (for example) use to process ACH transfers? Is there a similar circumstance/blind spot/gap where our funds are at neither the sending or receiving institution and may be subject to similar loss as these fintech companies in your article? Would there be a time when our funds are not protected by NCUA or FDIC coverage while the funds are in transit?

  10. How about finworth and Merrill bank. Are they considered fintech?

  11. John would this blindspot apply to m1 finance? are you going to pull your investments from there? If so, what broker and bank will you go too?

    • Based on my interpretation of M1’s setup for their “Cash Account Deposit Network”, they are running something like Synapse where they have a brokerage account and then the cash is swept into a partner bank for pass-through FDIC insurance. Since this appears to be an FBO setup, I would treat this like a fintech. You don’t get your own individual account at each bank, and M1 or a middleman has the responsibility of tracking all these various sweep transactions. If M1 or the middlemen get into a similar dispute as with Synapse, you could lose access you your money. I plan to avoid.

      • I’m not sure this is accurate. I have an M1 High yield cash account, and I have a specific account #, and routine # that links to B2 Bank, which is FDIC insured. This makes me think that I single an individual account at B2 bank since I have an account #. But let me know if you think I’m interpreting that incorrectly.

        • Juno and Yotta users had routing numbers and account numbers with Evolve Bank & Trust as well. You can have your own unique routing and account numbers with FBO accounts. If you see the language “M1 is not a bank”, then well, they are not a bank and you are not opening a bank account in your own name. I believe that M1 is using FBO accounts like other fintechs, which means that there is one big FBO account with M1’s name on it, not yours, and M1 is in charge of handling the ledger that tracks all the transactions.

          “M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc. M1 High-Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC.”

          • Brian Magee says

            Jonathan you also have investments with m1 such as etfs I believe. Do you plan to pull those as well and leave m1 fully and completely?

          • The ETFs held by M1 are not in any regulatory blind spot, they are clearly covered by SIPC insurance and standardized protocols as they are located firmly in a brokerage account.

            It’s the space between M1 brokerage and the bank that is the regulatory blind spot. If somehow M1 and the depositing bank don’t agree on how much money you have held at the bank, and especially if M1 goes bankrupt, then your money may be stuck and and dispute for an extended period of time. You don’t have an account in your name at B2 bank with M1. It’s an FBO account in the name of M1, and M1 has a ledger with your name on it in a database somewhere. Imagine it’s in a database owned by a bankrupt company with no employees, and that’s Synapse and Yotta right now.

  12. I have always been fearful when the “holding company” bundles your money to a bank, and the bank has no knowledge of you and your money specifically. I would not even try out a bonus offer. Not sure how $85 million vanishes without some crime in place

  13. I don’t blame the FDIC here. Not their job either way. As I understand it the Fintechs like Yotta have ‘partner’ banks that do have FDIC coverage. The money is supposed to be in the partner bank. Thats what the ad captured from Yotta says. I don’t see this as a situation where the FDIC should be covering problems at the Fintech company specifically. And it doesn’t really seem like false advertising. But that doesn’t fix the problem at hand. I’d assume/hope that the money in the actual FDIC bank is still sitting there waiting for the bankruptcy and such to resolve so the account owners can get their funds back. Hopefully the problem with Synapse will be sorted and people will get their money.

  14. Interesting commentary and sadly I think you’re right. I would like to think that some of the bigger robo advisors like Betterment and Wealthfront wouldn’t fall into this category for their “savings” accounts, but all this makes me not so sure.

  15. What about Fidelity? My understanding is that their cash Sweep of uninvested cash into a 4.96% account works similar to a FinTech model with a ledger system. Unlike a Schwab investment account which requires you to purchase a money market fund for uninvested cash if you don’t want their 0.45% sweep.

  16. Sodium120 says

    What about Fidelity/Betterment/E-TRADE all offer checking accounts.

  17. nisiprius says

    It’s not the FDIC’s job to grant wishes to wishful thinkers.

    I agree that the fintechs have done their very best to encourage wishful thinking from customers, through the use of bankish terms like “bankING” and “deposit” and “APY,” while also making perfectly clear statements like “Juno is a financial technology company, not a bank” but burying it in small grey type at the bottom of the page and not explaining what that really means. I think the fintechs have indeed been abusive about this. But the appropriate role for consumer agencies is to try to make them quit doing that, and make plainer disclosures of what protection “neobank” customers do and don’t have.

    In this case, as far as I know, Juno and Yotta’s “partner bank,” Evolved Bank and Trust, is indeed FDIC-insured and solvent–although they’re in trouble with the Federal Reserve for sloppy management. If it should transpire that it is not solvent, I expect FDIC WILL step in.

    I don’t see that the FDIC has the responsibility of keeping Juno and Yotta’s broken promises to individual customers. Its only responsibility might be to try to make fintechs quit making false promises. The FDIC actually HAS made new regulations on the way the FDIC name can be used by fintechs, which unfortunately won’t take effect until 2025.

  18. This makes me wonder about the cash management accounts at some of the big brokerages, for example the Fidelity Cash Management Account and the Vanguard Cash Plus Account. Both Fidelity and Vanguard accept cash funds from customers and then sweep them into the various banks that they have agreements with.

    Both Fidelity and Vanguard state that the funds on deposit are eligible for FDIC insurance, but it seems likely that at the bank level those funds are held in the name of the brokerage, which apparently acts as a middleman.

    • nisiprius says

      Sure, the brokerage acts as a middleman. The big difference between having a middleman and having an account directly at a bank is that we are used to thinking “money in the bank is safe,” because the FDIC guarantees it. We only need to do two bits of due diligence: make sure the bank’s an FDIC member, and that we’re under the insurance limit.

      The FDIC has nothing to do with the middleman, and if you’re using a service with a middleman, then you need to personally evaluate the honesty. financial condition, and business situation of the middleman–which few of us are in a position to do. It doesn’t seem crazy to me to assume that Fidelity or Vanguard are probably OK. But (in order of decreasing probable trustworthiness) a Wealthfront, an HMBradley, a Juno, a Yotta, or a Beam Financial?

      But no, a Fidelity Cash Management account is NOT the same thing as a bank.

  19. I’ve taken all of my cash out too, it’s shocking that there isn’t more attention on this and I think that the FDIC blog post about “third party apps” is them saying they’re not getting involved. If the Synapse bankruptcy didn’t register, I’m not sure will. The only hope is that they’re working on something behind the scenes.

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