Fintech
The FDIC leaves all unprotected Fintech users in a regulatory blind spot! (Too young to care?) – My money blog
I’ve been traveling internationally for the last two weeks, and with all the chaos of trying not to lose any of the kids on whatever subway ride or multi-transfer hiking trail is the order of the day each day, I’ve felt quite relieved that 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 liquidity so I don’t worry about daily cash flow (matching payday times with expenses).
Unfortunately, for people who put their daily money into “checking accounts” of fintechs like Juno and Yotta, the last few weeks have been the opposite. Their money is frozen in limbo, with a bankrupt Synapse rapidly shrinking and laying off all its employees while pointing the finger at everyone else. Approximately $85 million in user funds are unaccounted for. Apparently the bankruptcy judge has very little power (and no money) and has used a private forensic accounting firm to help him “pro bono.” Given the possibility of theft there, I think potential jail time should be on the table, personally. Jason Mikula by Fintech financial weekly it is still the best source for tracking new developments.
The FDIC has maintained its position that this is not a bank failure, and therefore it is not its responsibility to help. Instead, they just quietly updated their website with some “useful” content Consumer News:
Increasingly, some consumers are choosing to open accounts through non-bank companies (typically online or through mobile apps), such as technology companies that provide financial services (often called fintech companies), which may or may not have business relationships with banks. Whether and how a bank is involved is crucial to understanding whether or not your money is protected by deposit insurance. However, in some cases, it is not always clear to consumers whether they are dealing directly with an FDIC-insured bank or a non-bank company.
[…] However, FDIC deposit insurance does not protect against the insolvency or bankruptcy of a nonbank company. In such cases, although consumers may be able to recover some or all of their funds through an insolvency or bankruptcy proceeding, often administered by a court, such recovery may take some time. As a result, you may want to pay particular attention to where you place your funds, especially money you rely on to meet normal day-to-day living expenses.
This is clearly a huge regulatory blind spot. The FDIC has publicly allowed millions of individuals to open accounts with these companies that promote “banking,” “savings accounts,” “checking accounts,” and, most importantly, “FDIC insurance.” The FDIC has allowed this publicity to happen for years and years. Everyday consumers clearly believe that their money is “safe” and insured by the FDIC. Why shouldn’t they? The system benefited from the addition of billions of dollars in deposits in partner banks. Many of these customers are previously “underbanked”.
Chime has over 20 million customers and over $6 billion in deposits. Do you think all those people know that they could immediately lose access to their money for months? Do you think they know they could suffer permanent financial losses if Chime doesn’t track everything perfectly?
I really believed that some regulatory agency, perhaps the Consumer Financial Protection Bureau (CFPB) in conjunction with the FDIC, would step in to fill this blind spot. And instead everyone backed away. In my opinion, this is the case where many small individual consumers are ignored. If this had been a bigger story, if there had been more political pressure from a single powerful person or company, I believe some positive action would have occurred.
Instead, fintechs are essentially being thrown back to the Great Depression era, before FDIC insurance existed and you never knew if your bank would fail and your money would disappear. How can the individual consumer know if their fintech is correctly reconciling every single transaction? If a company can simply lose $85 million in user deposits that were marketed as “checking accounts” with “FDIC insurance” and have no repercussions because they filed for bankruptcy, then this is the Wild West again. What does it matter if there is pass-through FDIC insurance, if a simple addition or subtraction reconciliation error by the company can nullify it?
The following quote is attributed to John Maynard Keynes when asked if he had changed his position (long backstory):
When the facts change, I change my mind: what do you do, sir?
Well, I’ve changed my mind. The FDIC has enabled deceptive marketing but has also demonstrated that it will not protect the affected everyday consumer. I will never trust any fintech with my money for longer than it takes to get a quick sign-up bonus. I will probably avoid any type of deposit bonus that requires a longer waiting period. In my opinion, the silence from other fintechs has also been disappointing. This event stains them all. All my fintech funds will be withdrawn immediately.
Photo by Jeremy Bishop ON Unsplash