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Comment by Animats | Hacker News Reader

It's important to make sure that at no point in the process does any uninsured entity have custody of the money. That's the trouble with some "fintech" firms trying to do this. Remember, none of this matters unless the financial system is in severe trouble. Then it really matters.

From the article: “We represent 1,728 insured depositors at the now-failed bank who will really need their money Monday morning. Most had precisely $250,000 on deposit. We live to serve your mission of getting these insured depositors their statutorily mandated money back and after you cut one wire to us you’re done with them; we’ll take it from here.".

What could possibly go wrong with that?

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The author says you pick a "Too Big To Fail" Custodian, and my take is their tone is intended as serious advice (beyond just tongue-in-cheek) while also being an observation about groupthink in the industry:

What happens if Custodian fails? Well, ahem, plausibly the world ends in fire and blood. This is why Custodian was specifically chosen from the ranks of a count-on-your-hands number of the largest financial institutions in the world. This isn’t even the thousandth most important thing that breaks if Custodian breaks. Custodian cannot be allowed to break. Custodian is Too Big To Fail.

Realistically, Sweep customers are counting on the Custodian to properly maintain all the contracts, diligence, etc. that keep their deposits correctly segregated and protected.

Genuinely curious: How else could you mitigate risk here aside from obliging them to maintain diversified insurance, or using multiple Custodians (which puts you back at having to deal with multiple institutions)?

The father in law of an ex colleague of mine made a ton of money by investing in relatively high risk government bonds from his home country (Italy) many decades ago.

His thought process was basically "if Italy fails I'm gonna be screwed anyway", and it kinda worked for him.

I don’t understand what the fintech is adding to the equation. Brokered CDs have been a thing forever.

If you’re holding millions in cash shouldn’t you be using T-Bills and lines of credit for treasury management? DIY finance at scale is dumb.

I don’t understand what the fintech is adding to the equation.

The goal of these products is that, to you the user, it feels like "money in your account." You don't need to think of the mechanics of brokered CDs if you e.g. want to keep $750k on deposit at Schwab. You just... keep $750k on deposit at Schwab, and Schwab does some magic you don't care about, and you're insured.

Scale up the numbers a bit and sell it to companies, and that is the fintech pitch.

What happens if you use multiple sweep products? In your example the one from Schwab for 750k$ and the other one for (don’t quite remember) 5m$? Who checks that those two didn’t use overlapping banks?

> DIY finance at scale is dumb

It's also not a core competency a start-up should have to focus on. For all their talk of adding value, outsourced treasury management would have been a valid one.

This is why real businesses with real money have their bank use ICS or CDARS to get insured deposits, or liquid, short-term CDs, at N different partner banks. No leaving FDIC-insured-land, and it gives you easy withdrawals, too. It’s just a service offered as part of the banking network.

https://www.intrafinetworkdeposits.com/

Even small businesses that exceed FDIC-insured balances can also roll short-term T-bills, through various brokerages (most of which don't charge fees on Treasuries) or TreasuryDirect (which is free). That combined with a line of credit should make for decent cash management.

This is why real businesses with real money have CFOs. Anyone who was sweating the SVB collapse should hire a virtual CFO right fucking now because their company has no financial leadership.

I'd think logically, in this hypothetical scenario, that money from the FDIC receivership would be deposited into a new bank such that there is continuous coverage of deposit insurance on all the customers. But yes, reality is that fintech firms don't do everything perfectly, and there are complex constraints that I'm sure we're not aware of.

One key problem is bankruptcy. If the fintech ever touches the money and then goes BK, the court can and will pull back that money and likely pay some to folks who are not the customers, like employees who have senior BK claims.

In the linked hypothetical, fintech never touches the money, but the devil is in the implementation details and shortcuts happen.

This is important: FDIC insurance protects you if the bank goes bust, but it doesn’t protect you if the company/fintech/exchange you’re using goes bust, even if they use an FDIC-insured bank.

This exact issue came up repeatedly in the past few years with crypto companies whose FAQs and even executives falsely told people their deposited money was FDIC-insured simply because the company itself banked with an FDIC bank. That’s not how it works.

One of many recent sad examples: https://mobile.twitter.com/Frances_Coppola/status/1543279013...

Another one: https://mobile.twitter.com/Frances_Coppola/status/1640909892...

(Frances Coppola is a great person to follow on Twitter.)

Consolidating FDIC payouts into one big wire transfer introduces a single point of failure.

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