pretend banks™

[runr]

With all these FI accounts that use charter banks on the back end and come out with checking account like products, I get that 2 day early DD does not have FDIC until the day of the deposit is supposed to be released, or the 1 business day it takes to sweep cash to bank does not FDIC, but what about fraud protection? This is a popular post https://www.reddit.com/r/fidelityinvest ... ts/1d2pqj5 cash_management_account_warning_from_former_bank/?sort=confidence, OP feels they were not treated fairly as FIDO uses a 3rd party for the banking stuff as FIDO is not a bank. But why would anyone be protected less, compared to having an account with a bank directly?

[Tyler Aspect]

Right, Fidelity CMA is also a Fintech. I would not put in more than a few thousand dollars there. Isn't Vanguard also thinking about a competing product?

[chassis]

SIPC insurance.

[Tyler Aspect]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

[volstagg]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

This comes down to, do you trust Fidelity? I have 7 figures with them on the investment side, I do not lose sleep over the low 5 figures I keep in my CMA for day-to-day Bill Pay, ATM and checking. If Fidelity goes belly up I have a whole bunch of other problems to deal with.

[alex_686]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

FDIC or SPIC depending.

[Northern Flicker]

SIPC insurance.

I believe that SIPC insurance only will cover it if the intent of the deposit is to buy registered securities, or the deposit is the proceeds of a sale of or distribution from registered securities. Also, I believe that SIPC insurance only applies if the FINRA member goes out of business.

If it is cash to use for banking services like paying bills, SIPC does not apply. FDIC insurance would, but that does not cover a discrepancy between the front end ledger and back end bank.

[nalor511]

SIPC insurance.

I believe that SIPC insurance only will cover it if the intent of the deposit is to buy registered securities, or the deposit is the proceeds of a sale of or distribution from registered securities.

Nope, SIPC explicitly covers cash and securities. https://www.sipc.org/for-investors/what-sipc-protects

[Northern Flicker]

From the link you posted:

SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities.

[ChicagoBear7]

SIPC insurance.

Just remember, while chartered by the US government, SIPC is a private insurance organization controlled by member brokerage firms. Contrary to some beliefs, it is not an agency of the federal governement, nor does it have he fully faith and credit of the government behind it. That said, the brokerage industry has a vested interest in seeing that any failed firms are quickly resolved and the customers taken care of.

[alex_686]

SIPC insurance.

I believe that SIPC insurance only will cover it if the intent of the deposit is to buy registered securities, or the deposit is the proceeds of a sale of or distribution from registered securities. Also, I believe that SIPC insurance only applies if the FINRA member goes out of business.

If it is cash to use for banking services like paying bills, SIPC does not apply. FDIC insurance would, but that does not cover a discrepancy between the front end ledger and back end bank.

Your a bit off base here. Basically everyone is covered. It not like the SIPC is going to send over a mind reader to divine your true intentions.

The purpose of the above language is prevent abuse of the insurance system. You don’t want brokerages getting insured funding by offering investors high interest cash deposit. It is a heads-I-win, tails-you-lose situation.

It is similar when the FDIC doesn’t cover FDIC deposits. Failing banks can’t issue junk bonds to favored investors and instantly get them insured by moving these junk bonds into CDs.

[bd7]

This comes down to, do you trust Fidelity? I have 7 figures with them on the investment side, I do not lose sleep over the low 5 figures I keep in my CMA for day-to-day Bill Pay, ATM and checking. If Fidelity goes belly up I have a whole bunch of other problems to deal with.

I also have investments with Fidelity but I agree with not keeping a lot of money in the CMA. The reasons are numerous, but the bottom line is that I do NOT "trust" Fidelity. I don't think they will fail nor do I think it likely that they will outright steal my money, but what I don't trust them to do is to effectively manage problems in a timely manner or even at all. The experience of the Reddit poster linked in the OP is a good example--saying "sorry, it isn't us" when he is clearly a Fidelity customer is not what I'd call a good response. I've had other sub-par responses from them on a variety of issues. There just aren't very many good alternatives and certainly no perfect ones, so while I'm not shopping for a new brokerage firm I regard Fidelity in the same way I do Microsoft.

[alex_686]

SIPC insurance.

Just remember, while chartered by the US government, SIPC is a private insurance organization controlled by member brokerage firms. Contrary to some beliefs, it is not an agency of the federal governement, nor does it have he fully faith and credit of the government behind it. That said, the brokerage industry has a vested interest in seeing that any failed firms are quickly resolved and the customers taken care of.

I will point out that the FDIC isn’t exactly backed by the full faith and credit of the government. Yes, they have a modest line of credit at the Treasury but it isn’t unlimited.

More to the point, we are talking about custody issues. These tend to be modest. As such you don’t need as a massive pot as the FDIC, which has to deal with custody issues and a massively leveraged loan portfolio that banks have.

[nisiprius]

The question is what is happening to your money during whatever time it is not actually in an FDIC-insured bank, who tracks how many of the dollars in that FDIC-insured bank "belong" to you, and what are the chances and the consequences of a screwup.

My personal belief or bias or assumption is that the traditional brokerages are OK because their whole business is based on moving large amounts of money around safely, and keeping track of it, and they've been doing it for a long time. How good SIPC is is unclear. SIPC itself says

It is important to understand that SIPC is not the securities world equivalent of the Federal Deposit Insurance Corporation (FDIC), which insures depositors of insured banks.

And from the threads here I think nobody really knows (sorry, alex_686) exactly what SIPC does or does not cover in hypothetical situations that have never happened. (A brokerage hypothetically using Synapse, for example, to manage the conveyance of funds to and from partner banks).

I have much less confidence in the competence (or integrity or honesty) of the move-fast-and-break-things bros, the people who think that traditional finance is hidebound, and are full of innovative ideas that are innovative enough not to quite fit current regulations. The fintechs that have too much tech and not enough fin.

Fidelity and Schwab are not Wealthfront and Robinhood, and Wealthfront and Robinhood are not Yotta and Evolve and Synapse and Beam, but "reputability" is a fragile reed to rest on.

I think a lot of this is going to shake out in the next few years.

[Northern Flicker]

SIPC insurance.

I believe that SIPC insurance only will cover it if the intent of the deposit is to buy registered securities, or the deposit is the proceeds of a sale of or distribution from registered securities. Also, I believe that SIPC insurance only applies if the FINRA member goes out of business.

If it is cash to use for banking services like paying bills, SIPC does not apply. FDIC insurance would, but that does not cover a discrepancy between the front end ledger and back end bank.

Your a bit off base here. Basically everyone is covered. It not like the SIPC is going to send over a mind reader to divine your true intentions.

They may not have to if all you are doing with the account is paying bills. The account owner has to assert the usage in the SIPC claim and sign the claim.

Holding cash in a MMF unequivocally is covered by SIPC for ownership loss (not investment loss) because a MMF is a security.

At Fidelity, there is the option of a treasury MMF as the core position in the non-CMA brokerage account with support for inbound pushed ACH (eg a distribution from a mutual fund held elsewhere, or direct deposit payroll, social security, pension, or SPIA payment) and online billpay. Check-writing and debit cards also work, but may not be no-cost without a high enough overall balance. (I don't really want paper checks or debit cards hooked up to a brokerage account anyway).

The above provides the asset safety of a treasury MMF, the ownership safety of an audited account regulated by FINRA and insured by SIPC, and with core banking services. (Technically, the treasury MMF is only bound by the prospectus to hold at least 80% of its assets in treasuries or instruments backed by treasuries).

[nisiprius]

...I'll point out that the FDIC isn’t exactly backed by the full faith and credit of the government. Yes, they have a modest line of credit at the Treasury but it isn’t unlimited...

When I was able to access the url, which now is paywalled, Competitive Equality Banking Act (CEBA) of 1987 (P.L. 100-86, 101 STAT. 552), Section 901, I found:

In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States

That should put to rest the idea that the FDIC is fibbing.

[Added] Found it at the St. Louis Fed here.

[bling]

well, i guess this is another reminder to always lock your debit card. unlock it for ATMs and immediately lock it afterwards. use credit cards for everything else.

[alex_686]

...I'll point out that the FDIC isn’t exactly backed by the full faith and credit of the government. Yes, they have a modest line of credit at the Treasury but it isn’t unlimited...

When I was able to access the url, Competitive Equality Banking Act (CEBA) of 1987 (P.L. 100-86, 101 STAT. 552), Section 901, I found:

In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States

So if you think the FDIC is fibbing, I must ask you if you think Congress was fibbing.

[Added] Found it at the St. Louis Fed here.

I am not exactly sure where you are coming from. The FDIC has a $100b line of credit with the Treasury. That line of credit is certainly backed by the full faith and credit of the US Government. However congress certainly hasn't given the FDIC a carte blanche to underwrite unlimited risk. The FDIC resorted to some interesting maneuvers during the 2008 GFC to keep themselves under the cap.

I mean, Congress can promise whatever but legislatively $100b is currently the hard cap of their promises.

https://www.fdic.gov/deposit/insurance/ ... idence.pdf

See the footnotes in page 7. Don't believe the lofty language at the start of a resolution. Read the fine print.

[Geologist]

...I'll point out that the FDIC isn’t exactly backed by the full faith and credit of the government. Yes, they have a modest line of credit at the Treasury but it isn’t unlimited...

When I was able to access the url, which now is paywalled, Competitive Equality Banking Act (CEBA) of 1987 (P.L. 100-86, 101 STAT. 552), Section 901, I found:

In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States

That should put to rest the idea that the FDIC is fibbing.

[Added] Found it at the St. Louis Fed here.

Alex_686 has been making errors like this for years. In this thread (viewtopic.php?t=394011
from January 2023), he asserted that the FDIC was a “government sponsored not-for-profit corporation sponsored by Congress” and “they [meaning FDIC and SIPC] have the same government government guarantees – which is explicitly nothing but maybe there is something implicit.”

Multiple posters set him straight and he is still peddling the same errors.

Further, the FDIC line of credit with the Treasury is $100 billion and during the Great Financial Crisis from 2009-2010, it was increased to $500 billion. These are not modest limits by any reasonable interpretation.

[whodidntante]

I've been using Fido as a primary account for years, but I reckon the whole thing will crumble one day, and no one will do the right thing. Still pretty good, though.

[Northern Flicker]

I mean, Congress can promise whatever but legislatively $100b is currently the hard cap of their promises.

https://www.fdic.gov/deposit/insurance/ ... idence.pdf

See the footnotes in page 7. Don't believe the lofty language at the start of a resolution. Read the fine print.

Nothing in that footnote or anywhere else in the document states explicitly nor implies that the FDIC ex ante funding is a hard cap or the limit of the US govt's FDIC insurance obligations.

[alex_686]

Removed. Things are getting combative here.

[ez_mode]

The poster of that reddit thread provided an update today and said the issue is still unresolved even after filing a complaint with the CFPB against BNY Mellon.

Additionally, there are several other similar complaints at the CFPB against Fidelity/BNY Mellon/PNC Bank with similar issues of debit card fraud and lack of customer service to rectify the situation:

https://www.consumerfinance.gov/data-re ... il/8519610

https://www.consumerfinance.gov/data-re ... il/8346821

https://www.consumerfinance.gov/data-re ... il/7727889

https://www.consumerfinance.gov/data-re ... il/8269911

https://www.consumerfinance.gov/data-re ... il/7271702

[Northern Flicker]

I stated upthread that I would not have a debit card hooked up to a brokerage account, but a more general statement is that I won't have a debit card period-- only regular ATM cards.

[Northern Flicker]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

That would be covered if the cash was deposited for the purchase of securities or realized from the sale of or distribution from securities, and the brokerage failed or went out of business. If the brokerage was in business, but you have such a disagreement, there is no SIPC coverage. Complaints to regulatory authorities and filing lawsuits are your recourse in that circumstance.

[02nz]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

Is there a credible instance of this ever happening?

[Tyler Aspect]

SIPC insurance.

What if there are no frauds, but there are disagreement on bank ledgers so the history of who owns what is corrupted?

Is there a credible instance of this ever happening?

The Synapse bankruptcy impacted its clients. Some funds are still locked because of missing funds or inconsistent records.

[runr]

The poster of that reddit thread provided an update today and said the issue is still unresolved even after filing a complaint with the CFPB against BNY Mellon.

Additionally, there are several other similar complaints at the CFPB against Fidelity/BNY Mellon/PNC Bank with similar issues of debit card fraud and lack of customer service to rectify the situation:

https://www.consumerfinance.gov/data-re ... il/8519610

https://www.consumerfinance.gov/data-re ... il/8346821

https://www.consumerfinance.gov/data-re ... il/7727889

https://www.consumerfinance.gov/data-re ... il/8269911

https://www.consumerfinance.gov/data-re ... il/7271702

Ya, some other WELL informed redditer asked for a follow up.....So in this post was trying to talk about how pretend banks still need to follow the rules when it comes to accounts being compromised, we have Regulation E. With the FIDO novela, the ToS says apparently it's not FIDO's job (reminds me when I was in a union), and the 3rd party BNY Mellon said to kick rocks.

[Northern Flicker]

When a bank is failing, and the FDIC steps in, they try to find another buyer to take over the business, and doing so is generally what has enabled the FDIC to have depositors over the insurance limit being made whole. When banks buy the business of a failed bank, they sign non-disclosure agreements to evaluate the business ahead of the failure, and submit competitive bids for the business.

From: https://www.depositaccounts.com/blog/ba ... es/#p21332

A bank failure is a good reminder to make sure your deposits at other banks and credit unions are under the FDIC and NCUA limits. Even though no uninsured deposits were lost, that can’t be assumed to always be the case. If the FDIC can’t find a buyer for a bank and the bank isn’t important enough for the systemic risk exception to be approved, uninsured deposits will likely be at risk.

You can cover over $250k at one bank, but you have to be careful to ensure that you and your bank follow the FDIC rules. Also, it’s probably wise to keep your deposits below $250k at any fintech, such as Raisin, that is partnering with one or more banks.

It is interesting that acquiring banks don't want brokered deposits, so these are particularly at risk of loss if over the insurance limit.

It is hard to imagine a buyer for the book of business of one of the megabanks if it failed. Maybe it could be divided up and sold to multiple suitors. Alex_686 point out that the unwinding of a megabank would swamp the size of the ex ante fund. I think it would be speculative at best whether deposits over the insurance limit would be covered.

Alex_686 asked if there ever have been losses of assets over the FDIC limit when an FDIC-insured bank fails. It appears that the answer was yes when Enloe State Bank of Texas failed in 2017.

From: https://www.depositaccounts.com/blog/ba ... es/#p21332

It appears the FDIC Claims Agent will decide if amounts over $250,000 qualify for coverage based on ownership categories.

It also is worth noting that when an acquiring bank acquires a failed bank's business, they do not have to honor the rates for CDs held at the failed bank. This is true even if below the insurance limit. The acquiring bank will offer CD holders the option of closing the CD without penalty, or accepting the new, lower rate. This will simulate a call option, as the acquiring bank is likely to exercise this option when rates have fallen, and they would want out of the liability of the higher yielding CD.

The breaking of the CD rate can happen whether or not over the insurance limit, and would be a mechanism of offsetting costs to purchase business over the insurance limit. That could be a mechanism for depositors under the insurance limit to subsidize some of the would-be losses of depositors over the insurance limit.

I don't think the acquiring bank can modify the terms of a brokered CD, but they can try to refuse to take them. This suggests that brokered CDs are somewhat safer than direct CDs when under the insurance limit, but less safe if over the limit.

[Northern Flicker]

The poster of that reddit thread provided an update today and said the issue is still unresolved even after filing a complaint with the CFPB against BNY Mellon.

Additionally, there are several other similar complaints at the CFPB against Fidelity/BNY Mellon/PNC Bank with similar issues of debit card fraud and lack of customer service to rectify the situation:

https://www.consumerfinance.gov/data-re ... il/8519610

https://www.consumerfinance.gov/data-re ... il/8346821

https://www.consumerfinance.gov/data-re ... il/7727889

https://www.consumerfinance.gov/data-re ... il/8269911

https://www.consumerfinance.gov/data-re ... il/7271702

Ya, some other WELL informed redditer asked for a follow up.....So in this post was trying to talk about how pretend banks still need to follow the rules when it comes to accounts being compromised, we have Regulation E. With the FIDO novela, the ToS says apparently it's not FIDO's job (reminds me when I was in a union), and the 3rd party BNY Mellon said to kick rocks.

Fidelity and BNY Mellon pointing fingers with respect to who has Reg E obligations? Yuck.

[zero_coupon]

Right, Fidelity CMA is also a Fintech. I would not put in more than a few thousand dollars there.

CMA is just a brokerage account with some additional features. The main differentiator is involvement of program banks. However, if one selects SPAXX as the core fund, the CMA becomes similar to a standard brokerage account.

[nisiprius]

If anything is clear from the discussions, it is that nobody actually knows. "Pretend banks," fintechs, neobanks, rent-a-banks, and brokerage bank-based cash-management services have created new financial structures that are fundamentally different from banks--in the same way that depositing your money directly into your own bank account is fundamentally different from giving it to someone else to do it for you. They have creased fresh possibilities and ways things can go wrong. Until they do go wrong and people get hurt, nobody can say which are too far-fetched to worry about and which are plausible concerns.

I think the first example of true problems was presented by Beam Financial, mentioned in this forum four years ago: Beam Bank - 4% return. Notice that the poster inaccurately called it Beam Bank, proving that people do have trouble understanding these things.

Does anybody have experience with Beam Bank? They advertise in my IG feed a 4% return that is FDIC insured.

I think it is a intermediary between the end user and banks.

IDK...seems too good.

The point here is that Beam Financial proved that FDIC insurance in itself was useless when the customer-facing non-bank "storefront" was incompetent, borderline-fraudulent (did not really have the capability to do what it said), and didn't provide customer service.

This stuff is new. It's not all the same. We don't know yet what concerns are real and what are far-fetched. Giving your money to a non-bank--even Fidelity or Schwab--to put into a bank for you cannot possibly be exactly as safe as putting it in the bank yourself.

Eventually enough people will get badly enough hurt that the regulators and lawmakers will do something about it. In the meantime, you can't shrug it off by saying "the website says 'FDIC' and 'SIPC', that's all I need to know." You need to have a specific opinion about the specific institution. And it needs to be based on more than a website and an FAQ saying "why this is safe." And your opinion could be mistaken.

[NYCaviator]

If anything is clear from the discussions, it is that nobody actually knows. "Pretend banks," fintechs, neobanks, rent-a-banks, and brokerage bank-based cash-management services have created new financial structures that are fundamentally different from banks.

Very well said! And I think the take away is that one needs to proceed with caution using these banks.

The biggest problem with using a "pretend bank," even the Fidelity CMA, is that you are introducing a middle man between your money and the actual bank holding it. There's a lot that can go wrong, especially when you are relying two companies' technology to work together. Imagine the chaos if the ledgers don't match up. Or there's some massive outage like the recent Crowdsrike outage. Or the Fintech suddenly runs out of money and goes out of business.

It's easy for the bank to point the finger at the fintech or the fintech to point the finger at the bank. And without much regulation yet, it's not entirely clear how the consumer will be made whole if there is a problem. The odds are that you eventually will, but how long will that take and what impact will it have if all of your cash is tied up in one of those "banks"?

EDIT to Add: In terms of the reddit thread posted, that's scary stuff. People think the megabanks are terrible, but almost all of them will deal with a compromised card quickly and will issue a provisional credit while it's being investigated. If you read further into that thread the OP says that Fidelity was the Fintech, PNC was the bank that actually held the money, and BNY Mellon handled the debit card. That's way too many lawyers of complexity for comfort. It's no wonder all of these entities are denying liability.

[ez_mode]

If anything is clear from the discussions, it is that nobody actually knows. "Pretend banks," fintechs, neobanks, rent-a-banks, and brokerage bank-based cash-management services have created new financial structures that are fundamentally different from banks--in the same way that depositing your money directly into your own bank account is fundamentally different from giving it to someone else to do it for you. They have creased fresh possibilities and ways things can go wrong. Until they do go wrong and people get hurt, nobody can say which are too far-fetched to worry about and which are plausible concerns.

I think the first example of true problems was presented by Beam Financial, mentioned in this forum four years ago: Beam Bank - 4% return. Notice that the poster inaccurately called it Beam Bank, proving that people do have trouble understanding these things.

Does anybody have experience with Beam Bank? They advertise in my IG feed a 4% return that is FDIC insured.

I think it is a intermediary between the end user and banks.

IDK...seems too good.

The point here is that Beam Financial proved that FDIC insurance in itself was useless when the customer-facing non-bank "storefront" was incompetent, borderline-fraudulent (did not really have the capability to do what it said), and didn't provide customer service.

This stuff is new. It's not all the same. We don't know yet what concerns are real and what are far-fetched. Giving your money to a non-bank--even Fidelity or Schwab--to put into a bank for you cannot possibly be exactly as safe as putting it in the bank yourself.

Eventually enough people will get badly enough hurt that the regulators and lawmakers will do something about it. In the meantime, you can't shrug it off by saying "the website says 'FDIC' and 'SIPC', that's all I need to know." You need to have a specific opinion about the specific institution. And it needs to be based on more than a website and an FAQ saying "why this is safe." And your opinion could be mistaken.

For clarification, Schwab is an actual bank. It does have a feature similar to Fidelity's CMA that allows banking-like features added to a brokerage account, but this account is not recommended by Schwab to be used as a checking account (per a customer service rep I spoke to directly), and is really intended for international customers since Schwab cannot offer them the traditional checking account.

[chinchin]

My Fidelity CMA money is in SPAXX, which is a Fidelity money market fund. The partner bank is simply used as an outgoing payment rail.

[volstagg]

This comes down to, do you trust Fidelity? I have 7 figures with them on the investment side, I do not lose sleep over the low 5 figures I keep in my CMA for day-to-day Bill Pay, ATM and checking. If Fidelity goes belly up I have a whole bunch of other problems to deal with.

I also have investments with Fidelity but I agree with not keeping a lot of money in the CMA. The reasons are numerous, but the bottom line is that I do NOT "trust" Fidelity. I don't think they will fail nor do I think it likely that they will outright steal my money, but what I don't trust them to do is to effectively manage problems in a timely manner or even at all. The experience of the Reddit poster linked in the OP is a good example--saying "sorry, it isn't us" when he is clearly a Fidelity customer is not what I'd call a good response. I've had other sub-par responses from them on a variety of issues. There just aren't very many good alternatives and certainly no perfect ones, so while I'm not shopping for a new brokerage firm I regard Fidelity in the same way I do Microsoft.

I stand by my initial statement, either you trust Fidelity to manage your funds or you don't.

Yes, if you use the FDIC core with your CMA, those funds are being moved to a partner bank, behind the scenes. But it's really no different than SPAXX. SPAXX isn't 100% cash sitting in a vault somewhere, if you read the prospectus it's broken out into a series of short term corporate paper, treasuries, etc. Fidelity has to track all those investments, minus their overhead and come up with a percent return.

I trust that the balance on my online account, the balance that shows up in my monthly PDF statement will be available to me when I write a check, do a bill payment, ACH, ATM withdrawal, etc. It makes no difference to me how Fidelity breaks up SPAXX to maximize return. It would make no difference to me how Fidelity moves funds around partner banks to maximize return, I simply expect them to honor the balance on my account and make those funds available to me when I need them.

Why, because I trust Fidelity to do the accounting correctly. Trusting Fidelity, a company that has been around since the 1940s is a lot different than trusting a FinTech startup that's been around since last week. If you don't "trust" Fidelity, that's fine, do your business elsewhere, no one is forcing you to use Fidelity, but really, if there was a systemic issue with Fidelity and ATM/Debit cards like listed in that ONE Reddit post, there would be a lot more then the ONE Reddit post that people keep pointing at.

I'm not saying what happened to the Reddit user didn't happen, but I also have no way of knowing if it's true or if what the Reddit poster said is 100% accurate. More likely there is the Reddit posters side, Fidelity's side and the actual truth. We'll likely never know the actual truth.

[ez_mode]

This comes down to, do you trust Fidelity? I have 7 figures with them on the investment side, I do not lose sleep over the low 5 figures I keep in my CMA for day-to-day Bill Pay, ATM and checking. If Fidelity goes belly up I have a whole bunch of other problems to deal with.

I also have investments with Fidelity but I agree with not keeping a lot of money in the CMA. The reasons are numerous, but the bottom line is that I do NOT "trust" Fidelity. I don't think they will fail nor do I think it likely that they will outright steal my money, but what I don't trust them to do is to effectively manage problems in a timely manner or even at all. The experience of the Reddit poster linked in the OP is a good example--saying "sorry, it isn't us" when he is clearly a Fidelity customer is not what I'd call a good response. I've had other sub-par responses from them on a variety of issues. There just aren't very many good alternatives and certainly no perfect ones, so while I'm not shopping for a new brokerage firm I regard Fidelity in the same way I do Microsoft.

I stand by my initial statement, either you trust Fidelity to manage your funds or you don't.

Yes, if you use the FDIC core with your CMA, those funds are being moved to a partner bank, behind the scenes. But it's really no different than SPAXX. SPAXX isn't 100% cash sitting in a vault somewhere, if you read the prospectus it's broken out into a series of short term corporate paper, treasuries, etc. Fidelity has to track all those investments, minus their overhead and come up with a percent return.

I trust that the balance on my online account, the balance that shows up in my monthly PDF statement will be available to me when I write a check, do a bill payment, ACH, ATM withdrawal, etc. It makes no difference to me how Fidelity breaks up SPAXX to maximize return. It would make no difference to me how Fidelity moves funds around partner banks to maximize return, I simply expect them to honor the balance on my account and make those funds available to me when I need them.

Why, because I trust Fidelity to do the accounting correctly. Trusting Fidelity, a company that has been around since the 1940s is a lot different than trusting a FinTech startup that's been around since last week. If you don't "trust" Fidelity, that's fine, do your business elsewhere, no one is forcing you to use Fidelity, but really, if there was a systemic issue with Fidelity and ATM/Debit cards like listed in that ONE Reddit post, there would be a lot more then the ONE Reddit post that people keep pointing at.

I'm not saying what happened to the Reddit user didn't happen, but I also have no way of knowing if it's true or if what the Reddit poster said is 100% accurate. More likely there is the Reddit posters side, Fidelity's side and the actual truth. We'll likely never know the actual truth.

Believing the reddit poster's story is irrelevant. What is relevant is Fidelity's structure and ToS, which are irrefutable. Trust has no standing when it comes to procedural failures and anti-consumer terms and conditions. I am sure that redditor, and the numerous people complaints filed with the CFPB for the same issue, trusted Fidelity, too. I am sure Beam customers trusted Beam. I am sure Yotta customers trusted Beam.

We need to remove any emotion and personal bias when it comes to business decisions. Question: if you were doing any other business dealings, be it real estate, a divorce, buying a car, would you simply trust the person across from you without reading the actual documents that dictate the terms and conditions of the agreement you are entering into? I would wager the answer is no. So why should one simply trust the custodian of their money and ignore the legal agreement that comes with it?

I also do not see how being an old company has any merit to the discussion. Bear Sterns was 85 years old, and Lehan Brothers was 158 years old...do we need a reminder of what happened to them?

[zero_coupon]

...if there was a systemic issue with Fidelity and ATM/Debit cards like listed in that ONE Reddit post, there would be a lot more then the ONE Reddit post that people keep pointing at.

Here's an older case:

viewtopic.php?t=164207

[zero_coupon]

For clarification, Schwab is an actual bank. It does have a feature similar to Fidelity's CMA that allows banking-like features added to a brokerage account, but this account is not recommended by Schwab to be used as a checking account (per a customer service rep I spoke to directly), and is really intended for international customers since Schwab cannot offer them the traditional checking account.

But they're planning to house customer deposits at third-party banks:

viewtopic.php?t=436341

[ez_mode]

For clarification, Schwab is an actual bank. It does have a feature similar to Fidelity's CMA that allows banking-like features added to a brokerage account, but this account is not recommended by Schwab to be used as a checking account (per a customer service rep I spoke to directly), and is really intended for international customers since Schwab cannot offer them the traditional checking account.

But they're planning to house customer deposits at third-party banks:

viewtopic.php?t=436341

At this point it’s all conjecture and there has been no indication that it will impact Schwab Bank at all. It could be deposits over a certain limit, it could be voluntary in exchange for higher interest, we simply do not know.

[nisiprius]

I don't think Schwab is a bank. I think Schwab has a bank.

[bd7]

if there was a systemic issue with Fidelity and ATM/Debit cards

I'm not saying there is a systemic issue and I said so quite clearly. My issue is that from time to time ANY account or bank or brokerage or credit card can have issues--such as the debit card fraud that started the conversation--and Fidelity (and sometimes its chosen third-party providers) has not been great about responding intelligently to the occasional problem that does arise. All of this--and my own reasons for not keeping a lot of cash in the CMA--have nothing to do with Fidelity's solvency, accounting, SPIC or FDIC insurance or anything like that.

[BolderBoy]

I stated upthread that I would not have a debit card hooked up to a brokerage account, but a more general statement is that I won't have a debit card period-- only regular ATM cards.

Lucky you. Lots of ATM card providers cannot or simply refuse to issue a no-debit ATM card. I've been round-and-round with my local CU about this. The last time I asked USAA they refused to issue a "regular ATM card".

Keeping them locked when not going to be used right away seems like the only solution for those unfortunates like I.

[Northern Flicker]

Right, Fidelity CMA is also a Fintech. I would not put in more than a few thousand dollars there.

CMA is just a brokerage account with some additional features. The main differentiator is involvement of program banks. However, if one selects SPAXX as the core fund, the CMA becomes similar to a standard brokerage account.

How would having a MMF as core position add protection for a debit card compromise?

[AnnetteLouisan]

I don't think Schwab is a bank. I think Schwab has a bank.

[evancox10]

My Fidelity CMA money is in SPAXX, which is a Fidelity money market fund. The partner bank is simply used as an outgoing payment rail.

Did you read the Reddit post? The "outgoing payment rail" (ie the card) was compromised, the card holder reported the fraud within 12 hours, and they still haven't been compensated the $12,000 that was lost. Despite the card agreement saying that promptly reported fraud losses will be limited to $50.

[Northern Flicker]

I stated upthread that I would not have a debit card hooked up to a brokerage account, but a more general statement is that I won't have a debit card period-- only regular ATM cards.

Lucky you. Lots of ATM card providers cannot or simply refuse to issue a no-debit ATM card. I've been round-and-round with my local CU about this.

It isn't luck. We chose a local CU to use with that as a requirement. We keep $800-1500 earning only 0.1% at a local CU for ATM withdrawals and the occasional paper check (which may require moving assets to the CU explicitly for the check if it is for a larger amount).

[NYCaviator]

I stated upthread that I would not have a debit card hooked up to a brokerage account, but a more general statement is that I won't have a debit card period-- only regular ATM cards.

Lucky you. Lots of ATM card providers cannot or simply refuse to issue a no-debit ATM card. I've been round-and-round with my local CU about this. The last time I asked USAA they refused to issue a "regular ATM card".

Keeping them locked when not going to be used right away seems like the only solution for those unfortunates like I.

People are far too paranoid about debit cards on this forum, and seem to completely misunderstand them. Banks have daily ATM and purchase limits, which most banks let you adjust.

If I set my ATM limit somewhere around $400 and purchase $500, in the worst case scenario I’m out $900 for 24 hours until the bank gives me a provisional credit. It’s not like a thief can drain your account (unless you have massive limits) or steal your life savings if your debit card gets compromised. If one turns purchase alerts on, they’ll be fine.

[Liam_I]

At Fidelity, there is the option of a treasury MMF as the core position in the non-CMA brokerage account with support for inbound pushed ACH (eg a distribution from a mutual fund held elsewhere, or direct deposit payroll, social security, pension, or SPIA payment) and online billpay. Check-writing and debit cards also work, but may not be no-cost without a high enough overall balance. […]

The above provides the asset safety of a treasury MMF, the ownership safety of an audited account regulated by FINRA and insured by SIPC, and with core banking services. (Technically, the treasury MMF is only bound by the prospectus to hold at least 80% of its assets in treasuries or instruments backed by treasuries).

As of a few weeks ago, they changed it to allow that MMF in CMA as well.

(I don't really want paper checks or debit cards hooked up to a brokerage account anyway).

Seems to be marketed as another “I Can't Believe It's Not A Checking Account”, like if PayPal did a far better job providing the basics. I think the idea is they want you to hold a CMA account and a non-CMA account — Margin, even limited margin, simply isn't available on the CMA account; but CMA has the debit card reimbursement and a "self-funded overdraft protection" (which is blessedly opt-in and highly configurable) where if you write a bad check they'll sweep money from your non-CMA account to cover it — and just use the CMA account as a total replacement for a checking account.

[patrick]

Believing the reddit poster's story is irrelevant. What is relevant is Fidelity's structure and ToS, which are irrefutable. Trust has no standing when it comes to procedural failures and anti-consumer terms and conditions. I am sure that redditor, and the numerous people complaints filed with the CFPB for the same issue, trusted Fidelity, too. I am sure Beam customers trusted Beam. I am sure Yotta customers trusted Beam.

We need to remove any emotion and personal bias when it comes to business decisions. Question: if you were doing any other business dealings, be it real estate, a divorce, buying a car, would you simply trust the person across from you without reading the actual documents that dictate the terms and conditions of the agreement you are entering into? I would wager the answer is no. So why should one simply trust the custodian of their money and ignore the legal agreement that comes with it?

I also do not see how being an old company has any merit to the discussion. Bear Sterns was 85 years old, and Lehan Brothers was 158 years old...do we need a reminder of what happened to them?

Many people don't bother to read typical consumer contracts, even when buying a house or car where lots of money is involved. For one thing, they tend to be quite long and boring. For another, much of the stuff in them is standardized across the various companies in the same business anyway. I doubt that comparing Citi's fine print with Chase's fine print will find a dramatic hidden advantage to getting a loan from one instead of the other.

Trust matters to me because I prefer dealing with those who are honest enough to make lawsuits and regulatory complaints unnecessary. I'd also rather deal with a business that can be trusted not to lose my money due to procedural failures. Of course I cannot be completely sure who to trust, and I don't trust anyone absolutely, so I don't keep all my money with one financial institution.