Wealthfront Savings and the Yotta Debacle [Fintech banking concerns]

[MrM1]

[Moved to Investing - Theory, News & General subforum, hidden link & article title made visible - moderator Kendall]

Good Morning All

With the issues over at Yotta surrounding their Savings model
(See Article)
"Savings app CEO says 85,000 accounts locked in fintech meltdown"
How are Bogleheads feeling about Fintech Savings in General these days?

Fintech, Like Wealthfront, Bettermint, etc and their savings models use the same ledger keeping model as Yotta. Yotta relied on an outside party - Synapse - that went bankrupt. Now Users are locked out of their savings.

Could this Happen at Wealthfront? They claim they keep their own ledgers in house. But who knows. No one is sure.

Do you trust Saving large chunks of cash at Finteck like Wealthfront now?

[WinstonTeracina]

Thank you for sharing this story.

I opened a Yotta account back in late 2021 when short-term rates were near zero and their prize model allowed for an expected return of around 3% on the first $10,000 deposited if I remember correctly. I withdrew my funds eventually after interest rates increased, but it sounds like I would have very much been caught in this mess had I not. I knew that there were risks with depositing money with a company like this and to be honest just enjoyed the gambling aspect of their product. I would never consider placing a serious amount of money with these fintechs and do not believe they should be allowed to market their services as banking products in any way. I truly feel bad for customers who unknowingly trust these companies with their savings.

[bombcar]

Everything I've seen about fintech has been shady and suspect. Perhaps not more shady and suspect than tech in general, but there is no need to tie up your net worth in shady stuff.

Even Robinhood skeeves me out for anything more than just a few dollars in a play account.

It's also a reminder that though we may complain about Vanguard or Fidelity or whatever, it could be substantially and horrifyingly worse.

[MrM1]

Thank you for sharing this story.

I would never consider placing a serious amount of money with these fintechs and do not believe they should be allowed to market their services as banking products in any way. I truly feel bad for customers who unknowingly trust these companies with their savings.

Yes I feel bad for those folks. I even saw one YouTuber call Yotta a Bank. I do not think Yotta was being deceptive, just a real misunderstanding of the system.

That said, do you lump ALL FinTechs in the same boat? Something like Wealthfront has been around since 2008. I have been with them (as a Robo-Advisor) for about 12 years. I know the Investments side is still fine and is regulated just like any other brokerage, but the Savings Side is a new beast. I have had a good chunk of change in the Savings and actually had the 0.05% boost until Nov 2024 (right now at 5.5%). But I decided to move most of it out and going to purchase a MYGA Monday. The savings model ... even if something like a Wealthfront keeps their own books ... Seems a little suspect.

I do trust Wealthfront, and they say it won't happen to them, but it won't ... until it does. And then what?

I think in this "Space" (of new services) the US Federal Government, which currently has little to no over site, will probably have to start regulating this space more. And probably will, but it may not happen for a few years.

[MrM1]

Everything I've seen about fintech has been shady and suspect. Perhaps not more shady and suspect than tech in general, but there is no need to tie up your net worth in shady stuff.

Even Robinhood skeeves me out for anything more than just a few dollars in a play account.

It's also a reminder that though we may complain about Vanguard or Fidelity or whatever, it could be substantially and horrifyingly worse.

Agreed on the Savings Side. And Yes to your fears about Robinhood.

That being said, with all the buzz about Yotta and the Synapse Bankruptcy, It is my understanding that the Fidelity Sweep Account works much the same way as these Fintech Savings accounts. I am sure others here can correct/clarify me on this.

[bombcar]

That being said, with all the buzz about Yotta and the Synapse Bankruptcy, It is my understanding that the Fidelity Sweep Account works much the same way as these Fintech Savings accounts. I am sure others here can correct/clarify me on this.

They do, and this is why the fintech companies are never really a good investment - if they came up with a good AND legal idea, the big players will copy it eventually. The risk isn't worth the first-mover reward.

[WinstonTeracina]

Thank you for sharing this story.

I would never consider placing a serious amount of money with these fintechs and do not believe they should be allowed to market their services as banking products in any way. I truly feel bad for customers who unknowingly trust these companies with their savings.

Yes I feel bad for those folks. I even saw one YouTuber call Yotta a Bank. I do not think Yotta was being deceptive, just a real misunderstanding of the system.

That said, do you lump ALL FinTechs in the same boat? Something like Wealthfront has been around since 2008. I have been with them (as a Robo-Advisor) for about 12 years. I know the Investments side is still fine and is regulated just like any other brokerage, but the Savings Side is a new beast. I have had a good chunk of change in the Savings and actually had the 0.05% boost until Nov 2024 (right now at 5.5%). But I decided to move most of it out and going to purchase a MYGA Monday. The savings model ... even if something like a Wealthfront keeps their own books ... Seems a little suspect.

I do trust Wealthfront, and they say it won't happen to them, but it won't ... until it does. And then what?

I think in this "Space" (of new services) the US Federal Government, which currently has little to no over site, will probably have to start regulating this space more. And probably will, but it may not happen for a few years.

I respectfully disagree that they are not being deceptive. Their website has multiple mentions of FDIC coverage, encourages direct deposit from payroll and offers a credit card product. It would take an astute customer to conclude that they aren't actually a bank, which is very much by design in my opinion.

I certainly don't lump ALL Fintechs in the same boat, but I also have no reason to think they offer me any sort of service or benefit that I can't already get from my normal bank/broker. Fintechs were certainly more attractive a few years ago when their rates on savings prodcuts were 10-20x what you could get in a money market fund, but that does't seem to be the case now as indicated by the minimal boost you're getting on your savings.

[MrM1]

I respectfully disagree that they are not being deceptive.

I was being Polite and Generous . I cannot say I disagree with you. WFs fine print says (basically), in the event of a major issue, you will get "most" of your money back.

[MrM1]

They do, and this is why the fintech companies are never really a good investment - if they came up with a good AND legal idea, the big players will copy it eventually. The risk isn't worth the first-mover reward.

If it is correct that Fidelity's Sweep Account is a Ledger System (like a Fintech savings), could this happen there at Fidelity? I like the fact that you have to do nothing with your uninvested cash, it just draws the interest. Unlike a Schwab where you must go out and physically purchase a MM Fund ... AND then ... sell it if you want to buy a stock or ETF (which takes a day to close the MM Fund). But if Fidelity is using a similar ledger system ... are the risks the same? I have been moving stuff to Fidelity for the Uninvested Sweep account option.

[MrM1]

Thanks for the Responses. I had not seen a discussion on the boards here about this yet. Wanted to know how this group was seeing these events as they unfold.

[ResearchMed]

The headline at that link above shows:

"Savings app CEO says 85,000 accounts locked in fintech meltdown: ‘We never imagined a scenario like this’"

They never do "imagine scenarios like <whatever>", do they?

Some bad outcomes are truly surprises.
Others... not so much, at least not with at least a small amount of serious critical thinking at the planning stages.

Oh, but they'd need to disclose that IF they "knew" - or even thought - about "scenarios like this", right?



RM

[nisiprius]

I have learned somewhere that there's now a generic term, "Neobank," for something that isn't a bank but is a fintech providing customer-facing bank-like services while using a real bank for custody of the money.

I do put them all in the same negative category. In general, the customer acquisition cost for a financial institution is said to be in the $500 ballpark. That explains why it is so easy to score a few hundred dollars of free money in various ways. What I've noticed is the wide number of creative ways they put a limit on the total score. Sometimes it's an obvious signup bonus, but often with banks and such it's a genuinely terrific deal on rates--but with minimum deposits and caps on how big the deposit must be to earn that rate, and hoops to jump through, and a slow, gradual fadeout over a few years.

The fintech/neobanks seem to be following that model. And, unlike established banks, it's likely that in the early days the deals are being juiced by short-term VC money and aren't sustainable.

In exchange, you get a middleman in between you and the actual bank account, and you are dependent on a young, often small company for all customer service issues. If the business thrives, they can keep their promises and meet their expectations. If it doesn't, there is a serious risk of losing access to your money.

Whether you can build a better life for yourself by serially going for "free money deals" as many and as quickly as possible, I don't know. It's certainly not my thing.

As for deceptive, I feel they skate around the very edge by using words like "bankING" instead of "bank," hiding the disclosure "FoobarFunds is a financial technology firm, not a bank" in tiny grey print at the bottom of the website, and splattering "FDIC" all over the place when the the fintech/neobank is not, themselves, a member. If they didn't want their customers to misunderstand, they wouldn't do these things.

2007-2008 should have taught the dangers of trying to beat bank account deposit rates by a percent by investing in things that are not exactly bank accounts but are sort of kind of pretty much very nearly as safe.

[bombcar]

If it is correct that Fidelity's Sweep Account is a Ledger System (like a Fintech savings), could this happen there at Fidelity? I like the fact that you have to do nothing with your uninvested cash, it just draws the interest. Unlike a Schwab where you must go out and physically purchase a MM Fund ... AND then ... sell it if you want to buy a stock or ETF (which takes a day to close the MM Fund). But if Fidelity is using a similar ledger system ... are the risks the same? I have been moving stuff to Fidelity for the Uninvested Sweep account option.

You'd have to read carefully, but Fidelity is subject to some real regulations, and trying to sidestep them fintech style (even if technically legal) would get regulators poking around.

https://www.fidelity.com/why-fidelity/s ... r-accounts indicates they're FDIC insured and https://www.fidelity.com/bin-public/060 ... _(PDF).pdf seems to indicate they're doing it 'the right way'.

[exodusNH]

They do, and this is why the fintech companies are never really a good investment - if they came up with a good AND legal idea, the big players will copy it eventually. The risk isn't worth the first-mover reward.

If it is correct that Fidelity's Sweep Account is a Ledger System (like a Fintech savings), could this happen there at Fidelity? I like the fact that you have to do nothing with your uninvested cash, it just draws the interest. Unlike a Schwab where you must go out and physically purchase a MM Fund ... AND then ... sell it if you want to buy a stock or ETF (which takes a day to close the MM Fund). But if Fidelity is using a similar ledger system ... are the risks the same? I have been moving stuff to Fidelity for the Uninvested Sweep account option.

The difference is that Fidelity is a huge, established company. They likely handle the connections themselves rather than outsourcing it to a shady external organization.

Synapse lost a couple of huge customers because they decided to cut out the middle person. They then restricted "dashboard access" from the real banks participating in the system. As those banks are highly regulated and have strict know-your-customer and anti-money laundering rules, they froze the accounts.

[bople]

Not sure I would call Wealthfront or Betterment shady since they have both been around since 2008 and 2009. They are also starting to get some real traction and growing rapidly in AUM and revenue.

I would feel more comfortable investing in their FDIC cash accounts than a small credit union, and much more comfortable if I had more than $250,000. List of credit union failures since 2012 https://www.bankrate.com/banking/credit ... it-unions/ that we don't seem to be talking about. Not to mention some of the very large banks that have failed in the last 20 years.

Yes, if FDIC or NCUA have to get involved, your cash might be held up, but that is true for any entity holding your cash that would be shutdown. I do think that the fintech = risky label is overhyped if the underlying accounts are FDIC insured. Ultimately, each one of us has to decide if the party holding your funds is the right choice given the value, benefit, risk associated.

[nisiprius]

...The difference is that Fidelity is a huge, established company...

Yes. You need to evaluate the specific company, which is something consumers are not used to doing. Consumers have experienced ninety years of safety in "banks," with no need to look behind the FDIC logo.

With fintechs and neobanks--and Fidelity--the point is that the consumer no longer has that protection, and their experience, particularly with customer service and access to their money, are dependent on the reliability of the firm. They may promise to put your money in a real bank, and if they are even reasonably honest they will keep that promise, but that's not same as you putting in a bank.

You can hand a check to your spouse and say "since you are going to the bank you can deposit this for me," but it is not the same as doing it yourself.

Yes, if FDIC or NCUA have to get involved, your cash might be held up, but that is true for any entity holding your cash that would be shutdown.

No. If you have an account directly at an FDIC or NCUA bank, your cash does not get "held up." I personally experienced a credit union failure in an NCUA-insured credit union, and it was a total nonevent. I friend experienced a failure of an FSLIC-insured savings and loan, and it was a total nonevent. There wasn't any inconvenience, and the only customer-facing change was a different sign on the door Friday and the following Monday. I'm not sure if there's any interrupt in ATM machine operation nowadays. But your money doesn't get hung up for months or anything like that. Maybe 48 hours over a weekend.

[LambertStrether]

Oof. I just opened a Wealthfront cash account before hearing about Yotta. Cash accounts receive two statements: One from WF, and the other from Green Dot Bank.

https://support.wealthfront.com/hc/en-u ... h-Accounts

Is it fair to assume that the statement from Green Dot effectively short-cuts any ledgering middleman failures at issue with Yotta?

[bombcar]

No. If you have an account directly at an FDIC or NCUA bank, your cash does not get "held up."

There was a good article I can't find now about a reporter who rode along with FDIC for a bank seizure. It was quiet and subdued, and the bank closed on Friday and opened on Monday like nothing had happened. Most of the time FDIC gets a receiving bank to take over (with some encouragement from the fund) and all you see as a customer is WAMU replaced by CHASE logos. My family rode two banks into FDIC including Wamu and didn't really notice, and still used WAMU-branded checks long after it was Chase. We were also in on one of the largest thrift failures ever, too. Maybe banks should avoid us? But nothing happened to us personally.

The only time it gets a bit spicy is when you have something like Silicon Valley Bank that collapses with not enough money for the non-insured accounts (that are over FDIC limits). Then you can get some access issues, but even then FDIC tries its best to make sure you have access to some of your money for payroll, living expenses, etc.

[bople]

Yes, if FDIC or NCUA have to get involved, your cash might be held up, but that is true for any entity holding your cash that would be shutdown.

No. If you have an account directly at an FDIC or NCUA bank, your cash does not get "held up." I personally experienced a credit union failure in an NCUA-insured credit union, and it was a total nonevent. I friend experienced a failure of an FSLIC-insured savings and loan, and it was a total nonevent. There wasn't any inconvenience, and the only customer-facing change was a different sign on the door Friday and the following Monday. I'm not sure if there's any interrupt in ATM machine operation nowadays. But your money doesn't get hung up for months or anything like that. Maybe 48 hours over a weekend.

And I can give you a direct counterexample. When SVB was seized on Friday, all accounts completely froze and ACHs failed. Until the "All debts will be paid" announcement on Sunday from the Treasury Secretary--not standard FDIC procedure, lol--the internal messaging was that it could take a week to get our $250,000 insured amounts. And most customers had massively more than $250,000 on deposit. Accounts didn't actually unfreeze until Tuesday and all ACHs failed on Monday.

And this was an exceptionally fast FDIC response in that their actual legal standard is "as soon as possible". https://www.fdic.gov/consumers/banking/ ... yment.html If your funds are in a Trust, the FDIC has to review your trust before any repayment. This was not a "nonevent" or no customer inconveniences. SVB (or First Citizen I guess) went back and paid for any fees associated with failed ACHs, etc. but that took a few weeks.

[MrM1]

But ... are banks today really any safer these days ?

(From the "Invest Yourself" Newsletter)

Moving along, we find that the FDIC now has 63 Banks in GRAVE danger, but of course won't tell the plebes which ones they are, so they can get out. That's criminal, but hey... that's banking. Check this:

The number of banks on the Problem Bank List, those with a CAMELS composite rating of 4 or 5, increased from 52 in fourth quarter 2023 to 63 in first quarter 2024. Total assets held by problem banks increased $15.8 billion to $82.1 billion during the quarter.

Industry wide unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.

The industry's total loans declined by $35 billion, or 0.3 percent, in the first quarter. Most of the decline was reported by the largest banks, in line with a seasonal decline in credit card loans and lower auto loan balances.

Okay, so let me get this straight. We've got 63 banks on the critical list that could fold up on any particular day. The banking industry has losses on 517 billion worth of securities, but aren't losses yet as they haven't taken the hit.

Let me tell you something. That number is a feel good number. You can bet that the derivatives these 63 problem children have is multiple times that.

But here's the kicker.

The Deposit Insurance Fund (DIF) balance was $125.3 billion on March 31, up $3.5 billion from the end of the fourth quarter.

Catch that? Our entire banking system, with trillions in deposits, is still only covered by 125 billion at the insurance fund.

Banks collectively hold 517 billion in bad loans and securities, 63 troubled banks that could fold have 82 billion in so called assets, but unknown derivative liability.

IF there's a major systemic banking/debt market collapse, how far does the FDIC's 125 billion go? No where. Drop in the bucket. System collapses.

Risk is out there folks. Simmering, stewing. But as the heat continues to rise, one day it's going to boil over. We've tried to get you prepared for that, with countless articles on protecting yourself. I hope you heeded the advice.

[exodusNH]

But with now up to 63 bank closures, and bank debt exceeding 500 billion, and FDIC only having 128 billion in reserve (+/-) , are banks today really any safer?

Yes, because the insurance doesn't need to repay every dollar. It needs to cover the difference between what you have in deposits vs what's available. Rarely will the fund have to cover 100%. It's essentially just going to be topping people off, if there are even any losses.

Banks are usually taken over before it gets to that point.

[MrM1]

Yes, because the insurance doesn't need to repay every dollar. It needs to cover the difference between what you have in deposits vs what's available. Rarely will the fund have to cover 100%. It's essentially just going to be topping people off, if there are even any losses.

Banks are usually taken over before it gets to that point.

Your Post and my Edit (above) crisscrossed.

I updated my post above to clarify and cite my source

[bombcar]

But with now up to 63 bank closures, and bank debt exceeding 500 billion, and FDIC only having 128 billion in reserve (+/-) , are banks today really any safer?

Yes, because the insurance doesn't need to repay every dollar. It needs to cover the difference between what you have in deposits vs what's available. Rarely will the fund have to cover 100%. It's essentially just going to be topping people off, if there are even any losses.

Banks are usually taken over before it gets to that point.

Exactly - that article is scare-mongering fear-bait and should be ignored. FDIC's insurance isn't to cover all the losses, it's to cover costs and some losses when a bank dips below the line. And as we've seen, FDIC is backed by the US Gov't, which is likely to do more for a failed SVB type scenario than they will for some fintech regulation-avoidance scheme.

[observe_and_judge]

If it is correct that Fidelity's Sweep Account is a Ledger System (like a Fintech savings), could this happen there at Fidelity? I like the fact that you have to do nothing with your uninvested cash, it just draws the interest. Unlike a Schwab where you must go out and physically purchase a MM Fund ... AND then ... sell it if you want to buy a stock or ETF (which takes a day to close the MM Fund). But if Fidelity is using a similar ledger system ... are the risks the same? I have been moving stuff to Fidelity for the Uninvested Sweep account option.

You'd have to read carefully, but Fidelity is subject to some real regulations, and trying to sidestep them fintech style (even if technically legal) would get regulators poking around.

https://www.fidelity.com/why-fidelity/s ... r-accounts indicates they're FDIC insured and https://www.fidelity.com/bin-public/060 ... _(PDF).pdf seems to indicate they're doing it 'the right way'.

Fidelity is not FDIC insured. Your money that they will shuffle to a FDIC insured bank is. This is no different than any other fintech or neobank. They use the same slippery language as other fintechs, too, to delude the user into thinking their money is 100% as safe as banking with a real bank. It may be 99% safe, but it is not 100%.

[Harmanic]

Why bother with Fintech when there are plenty of other options that are government backed, like bank savings, iBonds, and money market funds?

[MrM1]

Why bother with Fintech when there are plenty of other options that are government backed, like bank savings, iBonds, and money market funds?

Rate Chasing. And I'm guilty. But I I've changed my ways.

That said, I have been with WF a very long time (in FinTech years) and have saved something with them since they started the program. They are have always did exactly as they claimed.

But that doesn't mean it can't change ... Over nite, as we've seen with Yotta

[hoofaman]

What's the reason people use these firms in the first place? I've never understood the appeal. Can't anyone create a brokerage account with Schwab or Fidelity and buy whatever funds they want with no fees? What do these "fintech" companies offer to clients that the client can't already get from a brokerage like Schwab?

[bople]

What's the reason people use these firms in the first place? I've never understood the appeal. Can't anyone create a brokerage account with Schwab or Fidelity and buy whatever funds they want with no fees? What do these "fintech" companies offer to clients that the client can't already get from a brokerage like Schwab?

Wealthfront and Betterment offer a tax loss harvesting direct index at $500K instead of Aperio and Parametric at much more and needing to go through an RIA/advisor. If you can benefit from TLH because you have other capital gain sources, the value is big.

Their cash accounts are also FDIC insured to $8M and $2M, but not everyone believes it is actual FDIC insurance I guess. I do.

Side note, the biggest beneficiaries in terms of assets of the SVB implosion on the business side where Chase, BofA and Mercury. Mercury is a fintech that does exactly what Wealthfront and Betterment do for FDIC insurance and has a $5M limit. I guess those companies are stupid since it is not real FDIC insurance and they just went through an FDIC insurance scenario.

[exodusNH]

What's the reason people use these firms in the first place? I've never understood the appeal. Can't anyone create a brokerage account with Schwab or Fidelity and buy whatever funds they want with no fees? What do these "fintech" companies offer to clients that the client can't already get from a brokerage like Schwab?

For younger people, a combination of cool and no fees.

The younger people seem perfectly content to do all monetary transactions on a device they're likely to forget at a bar.

[MrM1]

What's the reason people use these firms in the first place? I've never understood the appeal. Can't anyone create a brokerage account with Schwab or Fidelity and buy whatever funds they want with no fees? What do these "fintech" companies offer to clients that the client can't already get from a brokerage like Schwab?

I originally started ... Like 10+ years ago ... With a Wealthfront and Betterment account. This was before they offered savings . I put $1k in each at the same time to see how their Rob-Advisors would compare.

After a few years, WF won out and so I put more money in to the brokerage account there at WF . Did well. Probably not as much good as a VOO or SPLG though.

But that's the brokerage side, which seems to be fine. The savings vehicle is a whole different animal.

[bople]

Why bother with Fintech when there are plenty of other options that are government backed, like bank savings, iBonds, and money market funds?

Rate Chasing. And I'm guilty. But I I've changed my ways.

That said, I have been with WF a very long time (in FinTech years) and have saved something with them since they started the program. They are have always did exactly as they claimed.

But that doesn't mean it can't change ... Over nite, as we've seen with Yotta

I really wouldn't consider Wealthfront in the same bracket as Yotta. Yeah, they are both fintech, but WF is growing revenue like crazy and profitable (not to mention 16 years old)

https://www.forbes.com/sites/jeffkaufli ... o-advisor/
https://www.axios.com/pro/fintech-deals ... 00-million

As to rate chasing, I completely agree with you. Look at the DoC list for top rates, all strange banks/credit unions I have never heard off. I personally don't feel they are less safe than Wealthfront and Betterment. I don't think a startup fintech is the same as them either in terms of risk, and I would be equally comfortable with a large established credit union like Penfed, Alliant, etc. Each of us has to make their own decision ultimately on the risk, reward and value.

[LambertStrether]

For younger people, a combination of cool and no fees.

The younger people seem perfectly content to do all monetary transactions on a device they're likely to forget at a bar.

I'd bet that the median age of people who forget their phone somewhere has risen sharply over the past 10 years.
It's very hard to forget your phone at a bar, if you're using a ride-share app to get home.

[bople]

For younger people, a combination of cool and no fees.

The younger people seem perfectly content to do all monetary transactions on a device they're likely to forget at a bar.

I'd bet that the median age of people who forget their phone somewhere has risen sharply over the past 10 years.
It's very hard to forget your phone at a bar, if you're using a ride-share app to get home.

And your locked phone is far safer than leaving your wallet. Same with financial apps on your phone vs financial websites on your computer. Sometimes the new is not worse than the old.

[nisiprius]

...I really wouldn't consider Wealthfront in the same bracket as Yotta...

Fidelity isn't in the same bracket as Wealthfront isn't in the same bracket as Yotta isn't in the same bracket as Beam Financial. I agree. The point it that anybody can put up a slick website, and if you are going to work with fintech services that use banks but aren't banks, you need to perform due diligence and look at the financials and the track record and so forth. You need to make a serious analysis of the company's financial soundness, number of employees, record of customer service... and it would be nice for it to have been around for long enough to have gotten past the VC-funded startup age, and to have proven its stability through at least one major financial downturn.

You don't need to do that for an account in your own name in an FDIC-insured bank. Upthread someone is complaining that I was being overoptimistic when I said that the failure of an FDIC-insured bank is a nonevent for customers, by saying that SVB customers couldn't get their money by Monday, they had to wait until Tuesday. Oh, the humanity. But Beam's customers had to wait up to five months.

[greybus]

FDIC won't step in unless there is a bank failure, which technically did not happen here. Synapse (the middleman) went bankrupt and possibly there may have been some theft of funds, so the money may be recovered via bankruptcy proceedings. If there wasn't theft, the money is still technically there, just not accessible since the middleman who handles the ledger and tallies up who owns what is not functional.

Jonathan wrote about this recently
https://www.mymoneyblog.com/fdic-leaves ... ected.html

and has some more background about the entire story here:
https://www.mymoneyblog.com/fintech-app ... suits.html

[bople]

...I really wouldn't consider Wealthfront in the same bracket as Yotta...

Fidelity isn't in the same bracket as Wealthfront isn't in the same bracket as Yotta isn't in the same bracket as Beam Financial. I agree. The point it that anybody can put up a slick website, and if you are going to work with fintech services that use banks but aren't banks, you need to perform due diligence and look at the financials and the track record and so forth. You need to make a serious analysis of the company's financial soundness, number of employees, record of customer service... and it would be nice for it to have been around for long enough to have gotten past the VC-funded startup age, and to have proven its stability through at least one major financial downturn.

Agreed. I would say this do be true for even Fidelity/Schwab scale. There was reasonably chatter during the SVB implosion wondering about the status of Schwab's internal bank. BTW, the reason SVB imploded is that they had a great automatic wire interface and $42B got wired out on the day before seizure, the biggest bank run in history.

You don't need to do that for an account in your own name in an FDIC-insured bank. Upthread someone is complaining that I was being overoptimistic when I said that the failure of an FDIC-insured bank is a nonevent for customers, by saying that SVB customers couldn't get their money by Monday, they had to wait until Tuesday. Oh, the humanity. But Beam's customers had to wait up to five months.

That was me upthread. It was only 2 days because the Treasury Secretary basically decided over the weekend to end all speculation on when folks would have funds. As I mentioned, the messaging was "probably a week for individual/joint accounts", it was "we don't know but could be much longer for Trust accounts" and "we can't say anything for over $250,000". How many folks hold large deposit accounts in trusts for estate planning purposes?

BTW, the $250K FDIC limit is not very comforting. It is not really sane to have 10 banks you have to manage for $2.5M in cash. What do you suggest someone do if they need to keep high cash and it is not safe to use FDIC federators like Wealthfront, Mercury, Betterment? Use MMFs at the brokerages? That has $0 legal protection, though, I personally consider large multi-billion Treasury MMFs equally safe to FDIC insurance. But, as I have been saying, we all need to evaluate what we consider to be acceptable risk, reward and value.

[exodusNH]

BTW, the reason SVB imploded is that they had a great automatic wire interface and $42B got wired out on the day before seizure, the biggest bank run in history.

That was the immediate cause, but the underlying issue was bad risk management.

They offered long-term loans at interest rates lower than the Treasury notes and bonds backing those loans.

They also sold off their interest rate swaps, which left them under-capitalized when marking those Treasuries to market.

Had they had better risk management (and oversight), they would have never found themselves in that situation.

I do think there needs to be some adjustment to handle business cash needs that exceed limits. E.g., even my small company needs more than $250k on hand to cover biweekly payroll. Trying to have our finance people playing musical banks without violating labor laws by missing payroll is not feasible.

[MrM1]

Jonathan wrote about this recently
https://www.mymoneyblog.com/fdic-leaves ... ected.html

Excellent Read

Thanks for Posting.

[Gaston]

Not concerned, just curious. Vanguard offers a Cash Plus account with FDIC insurance up to $1.25 million. If one were to deposit this amount with Vanguard, I assume Vanguard would move $250k to each of five different partner banks in order to stay under the FDIC insurance limit.

I wonder if Vanguard maintains all the detail to show whose money resides in which bank, or whether they also rely on a 3rd-party intermediary. Anyone happen to know?

[MrM1]

Well, I would doubt that each account is opened in your name, with your name and social attached to each account. So some how it's lumped?

[alluringreality]

I wonder if Vanguard maintains all the detail to show whose money resides in which bank, or whether they also rely on a 3rd-party intermediary. Anyone happen to know?

I presume the following parenthesis from the linked December 2023 terms might intend to allow the option to use a third party:
"...are held in each case in the name of VBS (or its authorized representative) as agent for the exclusive benefit of VBS’ customers..."
https://personal.vanguard.com/pdf/Bank_ ... of_Use.pdf

[nisiprius]

BTW, the reason SVB imploded is that they had a great automatic wire interface and $42B got wired out on the day before seizure, the biggest bank run in history.

...That was the immediate cause, but the underlying issue was bad risk management...

Including lack of diversification in their depositors. As their name suggests, they concentrated on Silicon Valley startups, which turned out to have much less loyalty or inertia than the average depositor in "normal" banks. In his "Money Stuff" column, Matt Levine wrote:

...a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that... but it is a crude and imprecise approach to a basically social set of questions...

Silicon Valley Bank took a lot of interest-rate risk with its assets — it bought long-term bonds and got rid of its interest-rate hedges — perhaps because it thought it had pretty long-lived liabilities. Why not? It invested a lot in its relationships with its depositor customers ... The simple story of SVB’s failure is that it had an asset-liability mismatch... But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits....

This counterargument is not crazy! It just turned out to be totally wrong. It turned out that SVB’s depositors were not more loyal than average bank customers, but less loyal. Here is a Bloomberg News story about how the network of SVB customers panicked each other into a bank run....

SVB had a reasonable model of “networking with venture capitalists and making them love us and giving them wine will make them slow to move their money,” whereas in fact the right model was “having a very networked group of sophisticated customers means that they will be quite quick to move their money.”

It has also emerged that the Federal Reserve had been worried about SVB for a year, sending them 31 formal warnings ("Matters requiring attention" and "Matters requiring immediate attention.")

Meanwhile, the press did a really lousy job of distinguishing between customers with insured versus uninsured deposits, and pictures of lines outside SVB branches failed to explain that many of the people line were people with ordinary personal FDIC-insured accounts who had been spooked into believing that those accounts were at risk.

[nisiprius]

...You don't need to do [due diligence] for an account in your own name in an FDIC-insured bank. Upthread someone is complaining that I was being overoptimistic when I said that the failure of an FDIC-insured bank is a nonevent for customers, by saying that SVB customers couldn't get their money by Monday, they had to wait until Tuesday. Oh, the humanity. But Beam's customers had to wait up to five months.

That was me upthread. It was only 2 days because the Treasury Secretary basically decided over the weekend to end all speculation on when folks would have funds. As I mentioned, the messaging was "probably a week for individual/joint accounts", it was "we don't know but could be much longer for Trust accounts" and "we can't say anything for over $250,000". How many folks hold large deposit accounts in trusts for estate planning purposes?

Agreed, I would personally have been unnerved by that. There's still a complete difference in kind between "probably a week but we don't know" that turns out to be two days, versus the kinds of waiting times of months and years that can happen when a non-FDIC-member is somewhere in between you and your money. And SVB is an outlier, banks fail quietly all the time--

Source



--and I think SVB may be the only time it was a problem for insured depositors. Not even during 2008-2009, despite the failure of WaMu and some other giant banks. The only pictures of customers lining up outside banks that I remember were bank customers in the UK.

[gammalaser]

I feel that the value of bank regulation is really undervalued. Not just that the bank accounts get FDIC insurance, but the compliance/auditing/capitalization requirements on the banks which help to protect consumers even before FDIC has to step in. A fintech--of any size or age--will expose their customers to additional risks due to being unregulated.

[gammalaser]

We have debated how how it is deceptive that these fintechs are mistaken with banks but yet even in the titling of this very thread we have the words Fintech and banking next to each other. No wonder consumers keep getting confused!!

[typical.investor]

Not concerned, just curious. Vanguard offers a Cash Plus account with FDIC insurance up to $1.25 million. If one were to deposit this amount with Vanguard, I assume Vanguard would move $250k to each of five different partner banks in order to stay under the FDIC insurance limit.

I wonder if Vanguard maintains all the detail to show whose money resides in which bank, or whether they also rely on a 3rd-party intermediary. Anyone happen to know?

I don't know about Vanguard, but Fidelity does the same up to $5.0 million and shows you a list of which banks your money is in. They also offer a telephone number to remove a bank because perhaps you have holding there and would be over the limit. Look under 'Cash Management"/Account Services and there is an icon to see your list.

Fidelity states:

* The Cash Balance in your account reflects funds received as of today. Funds received are immediately covered by SIPC and when swept to an FDIC insured account at a Program Bank, are eligible for FDIC insurance subject to FDIC insurance coverage limits. The deposit at the Program Bank is not covered by SIPC. Customers are responsible for monitoring their total assets at a Program Bank to determine the extent of available FDIC insurance. All the FDIC insurance coverage is in accordance with FDIC rules.

[slowandsteadywins]

I really wouldn't consider Wealthfront in the same bracket as Yotta. Yeah, they are both fintech, but WF is growing revenue like crazy and profitable (not to mention 16 years old)
(...)
https://www.forbes.com/sites/jeffkaufli ... o-advisor/

This was a great read on Forbes. I was curious about this previous UBS merger and profitability of Wealthfront

[bople]

BTW, the reason SVB imploded is that they had a great automatic wire interface and $42B got wired out on the day before seizure, the biggest bank run in history.

...That was the immediate cause, but the underlying issue was bad risk management...

Including lack of diversification in their depositors. As their name suggests, they concentrated on Silicon Valley startups, which turned out to have much less loyalty or inertia than the average depositor in "normal" banks.

Agreed. But without the massive volume and speed of that outflow, it would have been a slow implosion like First Republic, with a relatively smooth weekend buy and no account/funds disruptions. I don't think even the big 4 could sustain a 20% of assets withdrawal in 1 day. It would have been another $100B the next day.

The Fed did a good postmortem: https://www.federalreserve.gov/publicat ... y-Bank.htm

[MrM1]

This was a great read on Forbes. I was curious about this previous UBS merger and profitability of Wealthfront

I can't read the Article, but if I recall, the UBS merger never happened.

[AlwaysLearningMore]

[Moved to Investing - Theory, News & General subforum, hidden link & article title made visible - moderator Kendall]

Good Morning All

With the issues over at Yotta surrounding their Savings model
(See Article)
"Savings app CEO says 85,000 accounts locked in fintech meltdown"
How are Bogleheads feeling about Fintech Savings in General these days?

Fintech, Like Wealthfront, Bettermint, etc and their savings models use the same ledger keeping model as Yotta. Yotta relied on an outside party - Synapse - that went bankrupt. Now Users are locked out of their savings.

Could this Happen at Wealthfront? They claim they keep their own ledgers in house. But who knows. No one is sure.

Do you trust Saving large chunks of cash at Finteck like Wealthfront now?

Spouse and I have always stuck with traditional FDIC banking institutions. Never considered any fintech account a worthwhile place for money for which we've worked so hard.