15
votes
Synapse collapse reveals lack of FDIC protection for fintech depositors
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- Title
- How thousands of Americans got caught in fintech's false promise and lost access to bank accounts
That one lady who only has 7000 and it's locked up.....how is she supposed to pay her bills and not have her credit tank?
These kinds of fintech stuff offer better rates and lower fees and nicer everything that big banks usually only reserve for their richest customers....which is exactly why regular people use them. But they're also the most vulnerable if their one and only financial institution has a hiccup.
I use something similar myself (Wealthsimple in Canada). The money is deposited into mystery banks which are CDIC insured, but WS itself isn't. If that were my only bank I would be wondering if I need to pull out some and put it in a regular bank
She can take a short term loan, or just not be able to. It is what it is. This would also be the case with a directly FDIC insured account - FDIC insurance doesn't mean "the government will immediately give you your $250k worth of insurance back". There isn't a maximum time for disbursement - it can also take months for the FDIC to work things out when a bank fails.
You are just guaranteed that you'll get that $250k worth... eventually. In this case, too, more than likely all customers will be made whole... eventually.
Time delay for disbursement of deposits is just a risk of banking in general. To reduce this risk, you can diversify the locations of your deposits, have more access to short term liquidity for your investments, or ensure you have access to capital liquidity via loans when necessary.
That seems to be downplaying the risks created through the use of these fintech middlemen, as well as the opacity surrounding them.
FDIC response to SVB failure:
So the FDIC took action on a Sunday so deposits would be available on Monday, the very next day.
The whole point of FDIC is to prevent a cascade of failures. That requires prompt action by the FDIC as the fear of a long delay can force bank runs that cascade.
The bigger issue here is this category of unregulated middlemen who are using these FBO accounts without the same rigor or oversight as fund management companies. The FDIC can't help if it's not the bank that is distressed, and the bankruptcy judge has no say over the banks or the app company, just the party who filed.
As an aside, I find it crazy that companies are still struggling with basic journaling ledgers to track customer deposits.
But to the lay person who is ignorant of banking regulations and the limits therein, they see the FDIC logo and assume they are protected. But it doesn't protect them if the app company or the middlemen servicers are the point of failure.
I also think it is crazy that businesses are trusting their payroll accounts to these unproven services. Talk about failing to manage risk.