Some Fintech Apps Are Promoting False FDIC-Insured Accounts: Here's What You Need To Know

Forbes

The answer–as evidenced by the collapse of Synapse–is not necessarily. Here’s what you need to know.  Read the full story on Forbes: https://www.forbes.com/sites/emilymason/2024/06/17/is-your-money-really-safe-in-an-fdic-insured-fintech-account/#:~:text=Bottom%20line%3A%20If%20a%20bank,implodes%2C%20all%20bets%20are%20off.  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00Today on Forbes, is your money really safe in an FDIC-insured fintech account?

00:07Four years ago, Lauren Scott was scrolling through TikTok when she saw a video from EcomJess,

00:12a personal finance influencer with 750,000 followers, promoting Yotta Savings, a fintech app

00:19offering a chance to win cash and other prizes on top of regular interest.

00:23Scott liked the novel sweepstakes incentive and Yotta's lack of fees,

00:27along with something way more traditional. Scott, who is 27 years old, says,

00:32quote, It was FDIC-insured, which is one of the main things that I looked for,

00:37because you never know what to trust. Scott and her husband, who live in the Tacoma,

00:42Washington suburbs with a 7-year-old daughter, eventually moved all their money to Yotta.

00:48Now the Scotts are among 200,000 or so fintech customers, including 85,000 from Yotta,

00:55who have been denied access to their so-called FDIC-insured accounts since mid-May following

01:01the Chapter 11 bankruptcy of a fintech intermediary, San Francisco's Synapse Financial

01:06Technologies. It's unclear when they'll get access to their money, and even whether they'll get it

01:12all back. At a court hearing last Friday, former FDIC chair Jelena McWilliams, appointed as bankruptcy

01:19trustee in the case, said there's a, quote, shortfall between Synapse's records and those

01:24of the banks, currently estimated at $65 to $96 million. Significantly, she added that it's

01:31looking increasingly likely that this isn't just a case of bad bookkeeping, but a real shortfall,

01:36that is, missing money, that existed before the bankruptcy filing and could take time and

01:41extensive investigation to sort out. David Schulzinger, a 40-year-old Phoenix insurance

01:47adjuster, has been frozen out of the $50,000 Yotta account he had built up over four years

01:53for vacations and unexpected expenses, such as his wife's recent surgery. He says, quote,

01:59Listen, I'm not a Ph.D. in finance, right? I'm not. I'm just an average everyman. It was always

02:05advertised as FDIC-insured. If I had for a moment thought that it wasn't, I would never have put any

02:11money in this account. U.S. bankruptcy court judge Martin R. Barash of the Central District

02:17of California, who is presiding over the Synapse case, has seemed equally flabbergasted by the

02:22regulatory black hole that the Fintech depositors and their money have been sucked into.

02:28The delay in sorting the situation out is all the more jarring when compared to what happened

02:32after California regulators shut down Silicon Valley Bank, also known as SVB, on Friday,

02:39March 10, 2023. By the following Monday, customers had access to their cash, and federal bank

02:45regulators had stated that all deposits would be covered to mitigate the risk of SVB's failure

02:50setting off more bank runs. The deposits covered also included those in excess of the normal FDIC

02:56insurance limit of $250,000 per depositor. In the Synapse case, the FDIC says it can't act

03:04because there hasn't been a bank failure. As it noted in a bulletin issued after the Synapse

03:09disaster, quote, FDIC deposit insurance does not protect against the insolvency or bankruptcy

03:15of a non-bank company. In such cases, while consumers may be able to recover some or all

03:21of their funds through an insolvency or bankruptcy proceeding, often handled by a court, such recovery

03:27may take some time. So do Fintech customers have any of the FDIC protection they thought they did?

03:34Turns out what most of them have is what's called, quote, pass-through FDIC insurance,

03:40meaning their money is held in an FBO, or for the benefit of, account at the bank, usually

03:45mingled with cash from the Fintech's other customers. In the case of a bank failure,

03:50the standard depositor insurance applies to FBO funds, provided, the FDIC states, there are clear

03:56records showing who owns what. But get this, the bank itself isn't necessarily responsible for

04:03maintaining such records. Those records could be maintained instead by a Fintech or an intermediary

04:09like Synapse, which functioned as a bridge between Fintech startups and the small banks

04:14holding customers' funds, and apparently in some cases, combined funds from multiple Fintechs

04:19in each of its FBO accounts. Bottom line, if a bank itself fails and a Fintech or other third

04:26party has good records, the Fintech's customers should be able to collect their insured deposits

04:31fairly quickly. If a non-bank Fintech, particularly one with deficient records, implodes, all bets are

04:39off. Meanwhile, it's difficult, if not impossible, for consumers to discern how responsibly individual

04:46Fintechs have set up accounts promising FDIC insurance. For full coverage, check out Emily

04:53Mason's piece on Forbes.com. This is Ciaran Meadows from Forbes. Thanks for tuning in.

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