Americans see their savings vanish in Synapse fintech crisis

>What's this pseudo bank's innovation? A raffle?

Who cares if it's just "a raffle"? Some behavioral economics research suggests it's a good way to get people to save, and it's not something offered by mainstream banks.

https://en.wikipedia.org/wiki/Prize-linked_savings_account

Not sure what Yotta is like now (or was in 2023), but it used to be a very good rate. I think I opened my account in early 2020. Went back and checked my notes for details:

Every week, you would get a lottery ticket for every $25 in your account. In July 2020, expected value for a ticket was $.0227 ($.0157 if you exclude the jackpot, Tesla, and other top prizes that you were statistically unlikely to ever win). They also paid out a base APY of .20%, which was higher than savings accounts at a lot of big banks.

Adding those together, the APY came between 3.51% and 5.02%, which was good compared to most banks at the time. Over time they made changes which decreased the expected value of each ticket, I closed my account in 2021 when the rate was no longer competitive. Looks like I quit at the right time.

I disagree with this previous premise: In finance, you should never assume incompetence over malice. It very rarely works out that way. Malicious incompetence maybe.

I suspect it's informed more by confirmation bias fed by the news cycle than actual facts. And Misty likely the rule of thumb featuring incompetence still holds.

Totally sounded like embezzlement to me too. Somebody at Synapse making the records intentionally unreconcilable/vague somewhere in the accounting chain so that they could claim some portion of that as their own. I guess it could be gross incompetence, but the embezzlement story actually seems more plausible in this scenario, especially given the animosity between the corporate parties involved. Maybe an incompetent CEO at Synapse who really believes the vague numbers they were given that doesn't line up well with the other banks' own records. The fact that there was a lottery system baked in that grabbed from a pool of "cash winnings" that was financed by the interest rates of deposits at other banks just adds to the opportunities for embezzlement. An employee "gets lucky" with the gambling setup a few times with a pot that is non-attributable, says more money needs to get transferred to the pot because somebody won a payout, etc

Yes but I don’t perceive them as a “major US bank”. I was expecting that term to mean the largest banks for typical consumers like Bank of America or Wells Fargo or Chase. Everbank is small, and GS is mostly an investment bank rather than a retail bank.

How does Everbank offer rates above the fed rate? Wealthfront offers good rates but they track the fed rate pretty closely.

People should just dump their cash savings into brokerage accounts and buy SGOV. It's even mostly state tax free.

Since the company the article is about is a new fintech, I’d say users should be comparing to online banks and not the old guard retail banks.

I.e. Marcus, Amex, citizen access, etc. note those are tied to very reputable businesses too.

Then there’s the hundred or more high yield online banks that are more unknown like live oak bank and others.

Choosing either of those two group to compare to, which since gotta was an unknown online bank seems far more appropriate than a legacy retail bank, and yotta’s interest rate is bad.

Just seeing the phrase 'financial technology company' is a red flag.

Over and over we've seen the same financial scam play out:

a) company starts up that explicitly avoids being a bank

b) company does something where some amount of money is placed in FDIC-insured banks, and it TRUMPETS on its website: "FDIC INSURED" over and over

c) consumers are misled into thinking their money is safe

d) regulators do not act

e) consumers lose all their money

f) profit (for a very specific set of individuals)

The company can even fake up a bunch of social media accounts to tell people reassuring lies right up until the scam collapses.

These scams will continue until regulators get serious about putting people in jail for them.

https://www.reddit.com/r/yotta/comments/1ctf25r/is_our_money...

Should I be suspicious that Wealthfront Cash accounts will fail as well?

What about Fidelity Cash Management Accounts?

>Wealthfront isn’t a bank, but we work with partner banks to get you an industry-leading APY, the security of FDIC insurance, and a full array of fee-free, no-strings-attached checking features — all wrapped up into one label-defying package we call a Cash Account.

https://www.wealthfront.com/cash

>The Fidelity Cash Management Account is not a bank account. It is a brokerage account that allows you to spend, save, and invest. The account offers competitive rates as well as spending and money movement features including a free debit card, checkwriting, Bill Pay, and more.

https://www.fidelity.com/spend-save/fidelity-cash-management...

> Banking services provided by Evolve Bank & Trust and Thread Bank; Members FDIC.”

I just don't understand why on Earth it's legal to use the term "FDIC" one sentence away from "not a bank" without there being a regulatory framework defining minimum record keeping and reporting requirements to avoid exactly this type of failure.

The European "e-money" scheme seems to be exactly the opposite: Deposits are not insured (I believe there are requirements on the stability of the depository bank), but intermediaries, i.e. "financial technology companies", have to make detailed reports about their customers' balances available on a very short time frame to avoid exactly such problems.

Ideally, there would be a combination of both (pass-through insurance against bank failure and reporting requirements to reduce the blast radius of non-bank failure).

See also

https://www.pewtrusts.org/en/research-and-analysis/issue-bri...

Premium Bonds are quite a popular savings product especially in times of low savings interest. What I find interesting is that NS&I, being government backed guarantee the security of all money in their accounts across all products, well past the ~£80,000 obligation that banks have.

Being a cynic means I also am confident someone will go to jail for financial crimes, but I am not confident that whoever does so will be the most guilty.

It reminds me of a certain country where one of the wealthiest powerful people set up a lottery system to persuade people to sign a petition espusong values of a politician well-known for not paying companies the full amount they're owed.

I don’t think Betterment distributes funds to centralized accounts like Synapse does, it establishes accounts in your name at those partner banks and provides a unified interface over those funds. You can do the same thing yourself by going to each bank individually and opening up accounts manually, but then you’d have to deal with KYC for each one and their online banking interfaces of varying quality. That’s how they get their $2 million insurance number, since they open accounts at 8 banks and FDIC insures $250k per account.

That was my understanding when I looked into Betterment Cash Reserve (I ended up just going the manual route because I’m paranoid).

Yes, brokerages do this with your cash sweep funds, but they always name actual partner banks. I believe the issue here is those banks moved the funds into non-banks

It's very difficult to make money disappear in the US system without getting caught eventually.

No criminal charges have been filed yet because it's not yet clear where the money went or who could have stolen it. The Madoff case didn't have this element of mystery because there weren't multiple layers of intermediaries to muddle things, and because the case was blown open directly by Madoff's confession.

Law enforcement is eventually going to figure out the answers to these questions, since they are knowable if you dig deep enough; it's just that this takes time. And then I would bet there will be criminal charges.

What specific regulation would have prevented this? Or is this just a knee jerk response against "deregulation"?

Sounding edgy doesn't really mask the fact you have no idea what you're talking about. See https://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street... for example

And to add to this, I think it was JC Penny that called this "80% OFF" sale out and stopped doing that. The result, they came very close to Chapter 11. They ended up reversing that policy just to stay in business.

This is just one example of how really stupid the Average American is. The past election also just proved how dumb the average person is in the US.

Seems like a rather large moral hazard if we don't?

At some point the courts should be able to say "ok fine you were the directors responsible for the company you're going to prison n years, sorry."

Bet we'd see a lot more documentation suddenly appear.

Command responsibility applies here. CEOs get multiple times their average employee's pay because of their responsibility, which should include responsibility to know when stuff goes wrong.

You have to prove the bank robber did it too? Why is it that we wiretap phones, subpoena companies, search homes and detain people for the lowest of drug crimes but everyone throws their hands up here?

Like, how did you expect to make a case if you don't do anything?

It depends. SOX compliance, if they were, actually literally does say the CFO and other officers who signed off on their accounting are liable. That’s the point of SOX. Synapse itself likely wasn’t unless it was preparing for IPO but their banking partners might be.

Their primary partner Evolve bank is not, but it is held to legal standards by the FDIC and other banking regulators and their lack of controls is probably where you might see executive management facing criminal challenges.

However everyone involved could face civil penalties.

If history had been different it’s likely this event would have turned up regulatory scrutiny on fintech precisely for these reasons - a privately held fintech can basically just fuck around and pretend to be a bank leveraging a poorly managed licensed partner holding the risk and abscond through incompetence with everyone’s money and no one suffer a consequence other than the customers. Sadly I don’t expect this to change in the next four years and there’s every reason to believe accountability will get worse as existing regulations and enforcement are potentially gutted. So caveat emptor is likely the law of the land until something so huge happens it can’t be ignored.

If you're a CEO running a business that sells what they call 'savings accounts' worth hundreds of millions of dollars and even have a system in place where it's even possible to make "'very large bulk transfers' of funds without identification of who owned the money" then you should be responsible for that. There's a good reason this doesn't happen at banks-- it can't. They have redundant business processes in place that prevent it from happening in the first place, and are constantly redundantly reconciling their transactions so if it does happen, it gets caught and corrected immediately. Not only did it happen, it happened without being able to figure out where the money even went.

Let's say I ran a company that made a product that I acknowledged is extremely dangerous without this one safety mechanism. Instead of creating multiple redundant systems to ensure that safety mechanism is in place, I just trust that some guy takes care of it without being absolutely certain-- it's expensive, annoying time consuming, blah blah blah. When a bunch of people get hurt because that guy pocketed the cash that was supposed to go towards that safety feature, hell yes I should be criminally responsible. It's negligence.

For $96 million, I would be a flight risk.

>Because if you allow it, you'll have hundreds of these everyday. The law is there to "scare" others from doing it not punish the perpetrator. On the other hand, you don't have hundreds of fintech startups raising millions >every day.

Surely the scale of harm caused is the metric here, and not the frequency of potential crimes individually committed

Sentencing? Who’s been charged? The article implied that regulatory bodies haven’t even raised an eyebrow— the parties are in mediation and synapse said they don’t even have enough money to audit their books, and are just sort of shrugging their shoulders about it. And doesn’t white collar crime need to be discouraged too? Probably even more so considering the scale of the impact? Hundreds of millions of dollars, uninsured. Maybe if the cops went around major metropolitan business districts frisking every middle aged person in upscale business casual attire with an expensive haircut to search for wire transfer receipts because they ‘met the description’ then extremely consequential white collar crime would be less frequent than it is.

It serves the same purpose as asking customers "are you a terrorist" -- it creates an easily prosecutable offence.

It should be a protected term in advertising. As soon as you use it, you surrender yourself to FDIC auditors.

That's batshit insane.

This is not true for fiduciary accounts, which are covered per principal. So FDIC coverage should extend to all customers if the account was properly declared.

This isn’t accurate. A fintech’s own money (as opposed to customer funds) may have low insurance. But if set up properly, those customer funds can have pass through FDIC insurance. See https://www.fdic.gov/financial-institution-employees-guide-d...

However this apparently doesn’t protect you from the failure of the third party, which is what is unexpected. If you look at this bulletin the FDIC put out after the Synapse incident, they’re basically claiming they aren’t stepping in because a bank hasn’t failed. A fintech that isn’t the bank, but has records of what’s at the bank, failed.

https://www.fdic.gov/consumer-resource-center/2024-06/bankin...

Personally, I find the explanation to be pretty weak - what does pass through insurance even mean then? Does every fintech startup need to also directly be a bank - if so that’s a huge barrier to entry and basically gifts incumbents with regulatory capture. If the money is in an FDIC protected account, it should be safe. It does not make sense to me that they would step in for Silicon Valley Bank’s failure, but not in this situation.

One weird part of the situation is that it seems the underlying bank does not have records about each customer and their numbers. To me that seems negligent on the part of the underlying bank. Surely they knew about this arrangement of pass through insurance and the need to protect funds. They should have maintained separate accounts for each client of the third party service. Regardless of negligence it seems the FDIC is trying to make this record keeping a requirement: https://www.fdic.gov/news/press-releases/2024/fdic-proposes-...

That's not true in the US generally (FDIC "pass-through insurance" is a thing).

The problem here wasn't a lack of FDIC insurance, but rather a lack of record keeping that allowed attribution of insured balances to individual beneficiary account holders.

Large banks have gone to great lengths to teach people that banks can never be trusted

I don't know what a de-facto bank is. To me the term is associated solely with FDIC protection. Otherwise why would I give them my money in the first place? Their only purpose is to give me access to electronic transactions via a debit card, and if I can't trust that my money will remain in the debit card the whole system collapses. FDIC protection covers more than I need for access to liquid cash and I'd prefer to manually manage my long-term cash well outside of savings accounts.

(Note, i'm intentionally ignoring the many other services banks offer as they're all fed by willing deposits and are otherwise irrelevant to FDIC protections.)

Nonetheless, your description of the problem is apt and I largely agree.

Especially for savings. Using a fintech for day to day banking has its uses (I'm a customer of Revolut and N26) and they blow traditional banks out of the water in terms of features and usability (at one point my traditional bank was blocking "suspicious" card transactions from "abroad"... Ireland and Luxemburg, stuff like Amazon and Uber).

But savings are mostly fire and forget, unless you decide to play an active part which is not for everyone and most people shouldn't.

And evolve just had a huge data breach triggering many business clients to leave.

One of the big use cases for me was/is the easy movement of money cross currency. Even something that should be easy like getting an IBAN as a US citizen is a pain/expensive without companies like Wise.

Savings accounts are a lucrative and relatively sticky offering. Many higher-rate savings accounts offer two (or more) tiers of interest, with higher rates applying to months where the customer does not withdraw or otherwise move money out of the account.[ß] The incentives mean that the customer is encouraged to deposit money INTO the savings account, but not take it out. If you don't have a full banking license, all that money is float - and you can invest it accordingly. Your net is the spread.

If you do have a full banking license, you can then use some of that sticky float for loans and earn a bigger spread. From what I have learned, small short-term business loans tend to be particularly lucrative, because the default rates can be impressively low. Big banks don't typically want to deal with those types of loans because the absolute ROI is simply lost in the noise and overall they do not move the needle enough to make a difference.

ß: you get access to better deals with less limitations if you have enough money to qualify for premier (or better) banking. The threshold is approximately the amount where the bank's wealth management unit becomes interested in you. I've told my bank that my absolute ceiling for any ongoing management fees is 25 bps and will manage my personal retirement funds accordingly. As a result they don't bother me, and I simply keep my fraction of investments at that bank in sufficiently low-cost instruments. I'm happy to pay my ongoing, sufficiently low management fees to them for this privilege.

Proudly displaying the Y Combinator logo right there on the home page.

Unfortunately Government regulations are almost never proactive, always reactive. Honestly a lot of these new fintech companies feel like they exist mainly to get around current regulations.

you should watch state of the union when they pan out to show congress(wo)man and senators and see about roughly their age based on how they look (or even easier, see it online). average age is like 87.7 :) how are they going to set fundamental rules about very complex fintech while talking to their grand-granddaughters on their nokia’s…

Right but then they have to litigate every new fancy attempt to dodge the rules individually, and they don't have the staff or the funding for that.

The Supreme Court has, for decades, been carving down regulatory powers to only exactly cover explicit, specific, literal interpretations of confessional law, so now we get thousands of potential cases that amount to "Stop touching the customer's money" "I'm not touching it, the atoms in my hand are getting close enough to the money to affect it with atomic forces, but nothing can be truly described as touching anything, if you think about it."

Solid fundamental rules don't work if the Court takes every possible chance to redefine every single term to make them not apply.

Ponzi schemes have a well-defined definition, and it's simply not what these folks are doing. What these people are doing is putting people's savings in ordinary savings accounts, taking the interest earned, and then giving a random person everyone's interest once a month.

To be clear, the comment I was responding to mentioned severe punishment; at no time did I promote the death penalty or any corporal punishment. "Skin in the game" simply means incentives and disincentives: if people can act behind the guise of an entity and without repercussions (privatizing benefits and socializing losses/detriments) then society ends up worse off.

There's no indication that's the case though? If the standard of evidence for executing CEOs is "maybe because there's embezzling going on because lack of records will help an embezzler", then it seems fair to execute programmers for introducing 0days because "maybe it's an intentional backdoor because a well placed memory corruption bug would help hackers". Even before the xz backdoor, accusations of vulnerabilities being intentional backdoors isn't uncommon.