Comment by hn_throwaway_99
1 year ago
But the fundamental difference is that the regulatory structures are in place to recover your money if a bank loses it. That's not the case with fintech middlemen. Take the Synapse case:
* End customers are really a customer of Yotta, a (silly IMO) fintech where interest was essentially pooled into a sweepstakes prize.
* Yotta was a customer of Synapse - they used Synapse BaaS APIs to open customer accounts (again, these accounts were really just entries in Synapse's ledger, and they underlying funds were supposed to be stored in an FBO account on Evolve).
* Synapse partnered with Evolve, who is the FDIC insured bank.
Synapse went bankrupt, and Yotta customers are finding out they can't access their money. But the bankruptcy court is at a loss as to really what to do. FDIC isn't getting involved, because as far as they can tell, Evolve hasn't failed. Synapse is basically out of the picture at this point as they are bankrupt and there isn't even enough money left to do a real audit, and Yotta is suing Evolve alleging they lost customer funds. But, in the meantime, Yotta customers are SOL.
If you had a direct relationship with an FDIC-insured bank, and they lost your money, there would be a much clearer path for the FDIC to get involved and make you whole (up to $250k).
There are regulatory structures in place for if your bank goes insolvent. AFAIK there is no regulatory mechanism for "I think The bank owes me $1MM dollars; they think I am not a customer". That's just a lawsuit.
FDIC would only get involved if the bank was insolvent?
If your bank and you have a disagreement over how much money should be in your account, then FDIC wouldn't be involved?
Banking regulators definitely would get involved, but you'd have to do some research on who you'd complain to first. For example, with national banks, you would first file a complaint with the Office of the Comptroller of the Currency: https://www.consumer-action.org/links/articles/office_of_com...
But, in all cases, there is a clear process to ensure no money goes missing, either through fraud, mistakes or insolvency. Banks require the blessings of their regulators to operate, so they are highly incentivized to ensure all of their accounting is accurate. With fintechs no such regulatory framework exists (at least not yet).
Yotta or its customers don’t have relationship with the bank though .
This case is like FDIC be involved because say Robinhood or stripe or Shopify or any other saas app went bankrupt and their customers are mad they lost money
How about Wealthfront Cash accounts? Wealthfront provides me a statement that shows how my deposited money is distributed among its FDIC insured partner banks, and each transfer they do to and from one of those partner banks. Wealthfront does use a middleman, somewhat similar to how Yotta used Synology as a middleman. But Wealthfront's middleman is FDIC insured: Green Dot Bank.
Wealthfront is a broker iirc, so you have some private insurance to protect you in the event of Wealthfront becoming insolvent.
The difference between them and some bullshit thing like Yotta is you are the customer of record for the account. The bullshit aspect of Wealthfront is they front real services with automated investment services. Yotta was pooling customer funds at some other bullshit fintech who was then putting those funds (or not) into one big account.
Personally, handling cash is an old business and I’m really conservative about who handles mine. Innovation is risk, especially when the money behind it is focused on eliminating accountability. Yotta should have been illegal. Keep accounting boring.
Wealthfront has multiple offerings. Wealthfront investment accounts are for stocks. Wealthfront Cash accounts are for cash. I was talking about Wealthfront Cash accounts, which don't have automated investment services, and I don't think involve a broker.
Some are better than others at bookkeeping, however FDIC only insures against risks of the bank they regulate. They don’t regulate the risks at the fintech co and they don’t insure it .
There is always residual risk between the bank and you with the fintech company. That’s what got Yotta in trouble ,they basically outsourced the heavy lifting of managing ledgers to synapse which you as customer have no control over.
For most people that risk is not worth losing their already modest savings over , that is why banks are regulated and FDIC exists after all.