This is a long overdue article about a warning that’s been circulating in the news for more than a month. However, I feel that I need to address it.
Younger Lazy Man was quick to sign up for many online accounts. I was an early adopter of peer-to-peer lending like Prosper and Lending Club. In hindsight, these investments weren’t very good. People with bad credit were allowed to create accounts, and then they just kept money from the platforms, probably because it couldn’t hurt their credit any more. At the time, I thought it was great that I could be like a credit card company earning huge interest.
You only earn the interest if people pay you. I learned the lesson the hard way, but at least I didn’t lose much money. I might have even made a percent or two.
I signed up with a bunch of other companies like Personal Capital (now Empower Personal Wealth) to track my investments. I understood a little more about these and learned that they could only read accounts – they couldn’t transfer wealth. I didn’t use them for banking. I would stick with Bank of America and USAA for that. For brokerages I stuck with TDAmeritrade (now Schwab), Vanguard, and Fidelty. These are big trustworthy names.
However, in the last couple of years, a bunch of new companies have come out. They are commonly referred to as fintech, which can include quite a number of apps. Some of these apps promised very attractive interest rates. Usually, it seemed like you could get a good bonus for transferring a certain amount of money to them. I didn’t follow these apps very closely. I would rather have my money invested in the stock market. In the cases that I needed to have cash, a lot of largely reputable online banks like Ally had a good enough rate.
In my younger days, I would have probably chased the better rate. It’s probably only that we’re in a better financial position that I avoided them, as they didn’t impact the bottom line.
Not everyone has been so lucky. Some of the Fintech platforms ran software on top of an underlying bank. These underlying banks are likely names you have never heard of.
Some people put a lot of their life savings into these platforms. They presumed that they were FDIC-insured. I’m not sure if Juno or Yotta’s Fintech platforms promised FDIC insurance, but it would not have been a surprise. After all, the underlying bank had FDIC insurance, and they were just a layer on top of that bank. (I’ve read in some articles that Yotta had billed itself as FDIC insured.)
Well, something went wrong at one of the middle levels of these banking systems, Synapse. Synapse had banking partners with whom it worked. A disagreement in the account with these banking partners had occurred. Synapse was short of millions of dollars and decided to shut down. Without that middle layer, the Fintechs can’t give customers their money back.
Now everyone seems to be pointing fingers. Customers are saying that their accounts should be FDIC-insured. The FDIC says it only insured banks and Synapse, being a middle technology layer, does not qualify. The underlying final banking partners that Synapse had worked with have not failed, so the FDIC can’t issue insurance in this case either. In the end, there seems to be no regulators that can apply any existing laws to help.
Some people had their entire life savings in these accounts. Now they can’t pay some basic bills.
There’s no help in sight.
Final Thoughts
People shouldn’t have had to understand all the layers. When Yotta said it was FDIC-insured, that should have been good enough. Maybe the FDIC should have had some people investigating these to intervene and correct them. I don’t want to place too much blame on the FDIC, though. It’s hard to see how it was their job to police claims on these websites.
I’m going to leave you with an analysis from a Fintech insider. Before I do though, remember what I said at the beginning about dealing with real name brands. Fidelity, Bank of America, etc. are real brands that have held assets for decades. They aren’t just apps that exist on your phone.
What Happens When You Get Too Good at Hiding Complexity
In fintech we’ve spent the last couple of decades abstracting as much of the complexity in financial services away from the end customer as we could.
We succeeded in making financial services more accessible, but we didn’t…
— Alex Johnson (@AlexH_Johnson) June 25, 2024
