pretend banks™

[hornet96]

My point is that there's no reason to delay taking care of Yotta's customers. Not when Evolve is sitting their holding their money. It's the customers' money, not Evolve's, and Evolve should give it back.

While I agree very much in principle, even assuming that all of the funds have actually been located, I am guessing that at least some delay in distributing those funds is related to the necessary process of sorting out the legal validity of customers' claims in bankruptcy proceedings, which is especially complicated given the nature of the middleman (Synapse) and its known sloppiness in recordkeeping. IANAL but once something goes into bankruptcy, my understanding is that identifying/validating/ranking of creditors' claims against the institution become the primary focus (which takes some time). Evolve (as an interested party in Synapse's bankruptcy proceedings) may not be able to legally just "give" the recovered funds back - that action may be (is likely) subject to the purview of the bankruptcy court.

Interestingly, the bankruptcy filing seems to indicate that as of June 20th, "Evolve and Lineage have both distributed most of the DDA funds they hold". I haven't read the filing in great detail, however, so it's not clear to me whether that distribution was to its customers or the bankruptcy administrator.

FWIW, at "non" pretend banks, the FDIC (as far as I know) would never let a real bank (in modern times) actually get to the point of filing for bankruptcy - it would be taken over Friday after close, transitioned over the weekend to its new owner, and redirect the login page on Monday to the new bank.

ETA: As the funds in question seem to have largely been pooled "FBO" (for benefit of) accounts, Evolve is also likely trying to limit its own potential exposure as it seems unclear based on existing records as to who held what in the FBO money pool (i.e. they want to make sure the funds claimed by creditors in the bankruptcy case are actually in their possession and thus they are liable for them, before just paying stuff out).

What a mess.

https://www.cnbc.com/2024/06/07/synapse ... ssing.html

https://www.cnbc.com/2024/06/21/synapse ... 20involved.

*Ledgers of the failed fintech middleman Synapse show that nearly all the deposits held for customers of the banking app Yotta went missing weeks ago, according to one of the lenders involved.

*A network of eight banks held $109 million in deposits for Yotta customers as of April 11, Evolve Bank & Trust said in a bankruptcy court letter filed late Thursday.

*About one month later, the ledger showed just $1.4 million in Yotta funds held at one of the banks, Evolve said.

*In a letter sent Thursday, bankruptcy trustee Jelena McWilliams pleaded with five U.S. regulators to get more involved in the Synapse collapse.

June 6 Bankruptcy Report

Evolve has informed the Trustee of its position that it would be improper for any bank performing payment processing and holding funds in an omnibus account for Synapse Brokerage, LLC to otherwise distribute those funds to platforms or end users at this time as the end users are
Synapse Brokerage, LLC customers, and Evolve does not have the authority to determine how to distribute such customer funds.

[tj]

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?

Fidelity CMA is not a fintech. That account existed long before fintechs started popping up

[volstagg]

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?

Fidelity CMA is not a fintech. That account existed long before fintechs started popping up

A rose by any other name....

While I love the banking features that Fidelity offers and have had a CMA for 15+ years now, the structure they use is the same as a FinTech. Just because the CMA offering predates the term FinTech doesn't change the structure.

What Fidelity isn't, however, is a startup FinTech with no track record of managing complicated accounts.

[volstagg]

Why not? The FDIC effectively insured all deposits at SVP even though the account owners had no reason to believe their accounts were insured.

Indeed, the account owners had strong reason to think they weren’t insured due to the balance levels, yet they were still saved

That situation was completely different. In the case of Silicon Valley Bank, each of the accounts in question were held AT the bank that was FDIC insured. Whether the FDIC should or shouldn't of stepped in to insure SVB accounts over $250,00 is something we can debate. But what's going on with the FinTech situation(s) isn't a case were the bank is failing, it's the guy who opened the bank account that's failing.

The FDIC insures an entire bank against failure. It isn't responsible to insure funds stolen / lost / misused by a single customer (like Synapse, etc) at an otherwise fully funded and operational bank.

[ScubaHogg]

Why not? The FDIC effectively insured all deposits at SVP even though the account owners had no reason to believe their accounts were insured.

Indeed, the account owners had strong reason to think they weren’t insured due to the balance levels, yet they were still saved

That situation was completely different. In the case of Silicon Valley Bank, each of the accounts in question were held AT the bank that was FDIC insured. Whether the FDIC should or shouldn't of stepped in to insure SVB accounts over $250,00 is something we can debate. But what's going on with the FinTech situation(s) isn't a case were the bank is failing, it's the guy who opened the bank account that's failing.

The FDIC insures an entire bank against failure. It isn't responsible to insure funds stolen / lost / misused by a single customer (like Synapse, etc) at an otherwise fully funded and operational bank.

I was talking about Nisi’s comments on Voyager

As an aside, with SVB the accounts above $250k were no more ex ante FDIC insured than the apples in my refrigerator. So whatever one thinks of it, it was the FDIC randomly making people whole

[ez_mode]

Why not? The FDIC effectively insured all deposits at SVP even though the account owners had no reason to believe their accounts were insured.

Indeed, the account owners had strong reason to think they weren’t insured due to the balance levels, yet they were still saved

That situation was completely different. In the case of Silicon Valley Bank, each of the accounts in question were held AT the bank that was FDIC insured. Whether the FDIC should or shouldn't of stepped in to insure SVB accounts over $250,00 is something we can debate. But what's going on with the FinTech situation(s) isn't a case were the bank is failing, it's the guy who opened the bank account that's failing.

The FDIC insures an entire bank against failure. It isn't responsible to insure funds stolen / lost / misused by a single customer (like Synapse, etc) at an otherwise fully funded and operational bank.

I was talking about Nisi’s comments on Voyager

As an aside, with SVB the accounts above $250k were no more ex ante FDIC insured than the apples in my refrigerator. So whatever one thinks of it, it was the FDIC randomly making people whole

It was the FDIC making people whole that are within their jurisdiction. I cannot imagine any scenario where the failure of a bank happens and the FDIC does not insure all depositors, regardless of the 250k limit. To not do so would result in a loss of confidence in the entire banking system.

Letting finctechs that intentionally operate outside of regular banking regulations fail is par for the course.

[Clairvoyant]

It seems that the FDIC is not making depositors whole - at least in this article from CNBC.

https://www.cnbc.com/2024/11/22/synapse ... anish.html

[alex_686]

It was the FDIC making people whole that are within their jurisdiction. I cannot imagine any scenario where the failure of a bank happens and the FDIC does not insure all depositors, regardless of the 250k limit. To not do so would result in a loss of confidence in the entire banking system.

The FDIC denies claims under 250k almost every year. These tend to be from insiders who issue CDs with extraordinary generous rates to friends and families. That is, abusive transactions.

Not exactly refuting what you said but putting some context around it.

[typical.investor]

It seems that the FDIC is not making depositors whole - at least in this article from CNBC.

https://www.cnbc.com/2024/11/22/synapse ... anish.html

Do note that those depositors were not placing money in an FDIC insured bank. They were transferring money to a fintech who said they would put it in an FDIC insured bank but apparently never put the money there and then went bankrupt.

If the bank that the fintech was using went bankrupt, then the FDIC would make depositors whole.

It like giving some guy on the street corner the money you wanted to be deposited at the bank and trusting him to deposit it for you. If he doesn't, then why would the FDIC insure it? The question is, why do investors trust the guy on the street corner with their money? If it is for a higher rate, one has to wonder how they are generating that and if risks are involved.

[patrick]

It seems that the FDIC is not making depositors whole - at least in this article from CNBC.

https://www.cnbc.com/2024/11/22/synapse ... anish.html

Do note that those depositors were not placing money in an FDIC insured bank. They were transferring money to a fintech who said they would put it in an FDIC insured bank but apparently never put the money there and then went bankrupt.

If the bank that the fintech was using went bankrupt, then the FDIC would make depositors whole.

It like giving some guy on the street corner the money you wanted to be deposited at the bank and trusting him to deposit it for you. If he doesn't, then why would the FDIC insure it? The question is, why do investors trust the guy on the street corner with their money? If it is for a higher rate, one has to wonder how they are generating that and if risks are involved.

The funds did go to an FDIC insured bank, in the sense that they received diect deposits to accounts using Evovle's routing number. They also allowed withdrawals through it, and debit card purchases on a card issued by Evovle, until they suddenly didn't.

The problem is that Evolve days they no longer have the money because it was transferred to the other banks in the whole ecosystem, but the other banks say they have already paid out what they have.

The slightly better rates could have been explained by the Fintech taking an initial loss to gain customers. Ironically, Yotta rates (in terms of expected value versus the best regular savings) ceased to be competitive well before the failure.

[typical.investor]

Do note that those depositors were not placing money in an FDIC insured bank. They were transferring money to a fintech who said they would put it in an FDIC insured bank but apparently never put the money there and then went bankrupt.

If the bank that the fintech was using went bankrupt, then the FDIC would make depositors whole.

It like giving some guy on the street corner the money you wanted to be deposited at the bank and trusting him to deposit it for you. If he doesn't, then why would the FDIC insure it? The question is, why do investors trust the guy on the street corner with their money? If it is for a higher rate, one has to wonder how they are generating that and if risks are involved.

The funds did go to an FDIC insured bank, in the sense that they received diect deposits to accounts using Evovle's routing number.

Then, the funds were moved out of an FCIC insured bank per the terms of Evolve's end user deposit agreement. So no, the money was not in an FDIC insured institution but rather in brokerage accounts that Evolve held for users at Synapse brokerage.

The problem is that Evolve days they no longer have the money because it was transferred to the other banks in the whole ecosystem, but the other banks say they have already paid out what they have.

No, the problem is that the user agreement allowed the money to be transferred outside program banks.

Evolve Bank & Trust ("the Bank") itself says:

Importantly, the Bank was not a part of the fintechs’ decision to migrate their programs to Synapse Brokerage and was not given an opportunity to provide input on the fintechs’ communications to end users. The Bank transferred end user balances from Evolve to the Synapse Brokerage program at Synapse’s instruction, in accordance with the Bank’s end user deposit agreement.

This means that the FinTech (Evolve) moved funds out of FDIC insured bank programs per the terms of their agreement, and the money got lost after that. I don't see why FDIC should be on the hook for what happened after withdrawals from program banks were made.

As for Synapse Brokerage, that appears to be covered by SIPC. I believe their license is now revoked for not keeping or filing records and not maintaining its required net capital.

As to whether SIPC will cover funds at Synapse Brokerage, I am not sure as cash held to earn interest (and not for the purpose of buying securities) is said to not be insured and in any case, SIPC would only step in if Synapse Brokerage was bankrupt.

So yeah, depositors gave their money to someone to deposit for them and also gave the person permission to withdraw it (assuming Evolve's interpretation of the use agreement is actually correct).

[Clairvoyant]

So, if you think you are investing with an FDIC bank but the bank moves the money through non-FDIC fintech companies, how do you look for assurances that your money is protected?

[tj]

So, if you think you are investing with an FDIC bank but the bank moves the money through non-FDIC fintech companies, how do you look for assurances that your money is protected?

You don't use those companies and you stick with banks or credit unions. That's the whole point.

[typical.investor]

So, if you think you are investing with an FDIC bank but the bank moves the money through non-FDIC fintech companies, how do you look for assurances that your money is protected?

You don't use those companies and you stick with banks or credit unions. That's the whole point.

And a clue is in the terms of service which states that you actually are not entitled to the interest earned.

Your Account is not an interest-bearing account and you will not be
paid interest or any other form of income on your funds held in any Account or Sub-Deposit Account. Even if we receive a fee from a Program
Bank, you are not entitled to interest on your Sub-Deposit Account. For the avoidance of doubt, you authorize us to collect and retain all payments
of income pertaining to the placement of your deposits at other Program Banks, including the Sub-Deposit Accounts.

And I presume clause the enabling them to move deposits from insured banks into a brokerage account (that didn't keep records) is the following that states they can place your money in their sole discretion even if there is no benefit to you.

Our placement of funds in the Sub-Deposit Account may reflect considerations of federal and state law, our funding needs and
funding needs of Program Banks, general economic conditions or other factors determined by us in our sole discretion. We may place funds to
enhance our business objectives and for balance sheet management purposes without any benefit to you. Subject to applicable law, your only rights
with respect to the Sub-Deposit Account are to demand that we repay you all amounts in your Account that were deposited with Bank and those
transferred to the Sub-Deposit Account from your Account.

Again, your claim is only the amount you contributed. You know, that is legally the same as in a Ponzi scheme. You are only legally entitled to your contributions no matter what you expect your earnings should be.

For me, I believe I should be entitled to the interest earned over time.

Perhaps there is another interpretation where you are due the interest earned, but the way it is worded would make me concerned you are not. Why would anyone agree to that? Shiny easy-to-use app? Defi is cool? Promotional rates?

[Clairvoyant]

Hey @TJ — thanks!

I’ve been having this debate with my brother, the POA for my 97 yo father.

He wants to invest the proceeds of the house sale in an online bank — and I have concerns. I’m not the POA so I can only voice that I am disagreeing with the decision to use an online bank, when an old, established institution would be just fine.

[tj]

Hey @TJ — thanks!

I’ve been having this debate with my brother, the POA for my 97 yo father.

He wants to invest the proceeds of the house sale in an online bank — and I have concerns. I’m not the POA so I can only voice that I am disagreeing with the decision to use an online bank, when an old, established institution would be just fine.

Is it a bank or a pretend bank?

[Clairvoyant]

TJ, the online bank is Quontic.

It’s hard to know if they process through a fintech that is not FDIC insured (as in Evolve and Synapse).

I found that Quontic disbursements were frozen by the fed for (an unknown) length of time in July 2023. That’s not the type of stability I’m looking for!

Then he found another bank with two branches in another state — and the money market fund had no checking privileges and one could only ACH out $5k/day.

Now he seems to be going with a major brokerage house but I don’t know how he’s going to get the step-mom’s signatures on the joint accounts because he is not her POA.

I’m not the POA, but I am a widow who has had to deal with an estate. My goal is simplicity — and making it easier both in life and in death.

[typical.investor]

TJ, the online bank is Quontic.

It’s hard to know if they process through a fintech that is not FDIC insured (as in Evolve and Synapse).

You have to decide for yourself, but to me the terms look nothing like that of Evolve. I haven't read Synapse's. Quontic seems rather like a bank. Evolve's has a lot of things that jumped out as red flags ...

https://www.quontic.com/quontic-bank-di ... deral-law/
https://www.quontic.com/wp-content/uplo ... losure.pdf

[Clairvoyant]

@TJ

I think “we” are heading in a different direction (by going with a well known brokerage).

This is a tale of two seniors who married 25 years ago and are now 93 and 97 and they never really planned for their “later years”. We have sold their house and are investing (safely, I hope) for the eventual survivor. They are in assisted living and can’t manage their finances.

“His” POA doesn’t know “her” POA. Her POA is not a sophisticated investor and is not in a populous area. I’m trying to make sure that her POA has fewer challenges if the wife survives. (Her POA hasn’t been activated yet — I don’t know who is going to sign the new bank documents, but that’s a whole ‘nother story.)

The pretend bank/internet bank/fintech bank put up a big flag for me.

[runr]

Just ask the FI, as some banks have subsidiary's so there is no increased risk for customers, or read the ToS.