Fintech locked people out of bank accounts

Investment Analysis Clubs Macro Economic Trends and Risks
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First… what’s fintech?

Financial technology (better known as fintech) is used to describe new technology that seeks to improve and automate the delivery and use of financial services. ​​​At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives. It is composed of specialized software and algorithms that are used on computers and smartphones. Fintech, the word, is a shortened combination of “financial technology.”…

Some examples include transferring money from your debit account to your checking account via your iPhone, sending money to a friend through Venmo, or managing investments through an online broker…

According to the U.S. Department of the Treasury, while fintech firms create new opportunities and capabilities for companies and consumers, they are also creating new risks to be aware of…[end quote]

This is a long article with a lot of examples of innovative fintech. Many people (especially young people) pretty much live on their smartphones. Many fintech apps have been invented for smartphones. Some of these are middlemen between highly regulated financial firms like banks and consumers who are unbanked or have trouble dealing with banks.

How thousands of Americans got caught in fintech’s false promise and lost access to bank accounts

by Hugh Son, CNBC, Tue, Jul 2 2024

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  • The collapse of middleman Synapse has revealed fintech’s promise of safety as a mirage. More than 100,000 Americans with $265 million in deposits have been locked out of their accounts.

  • The implications of this disaster may be far-reaching. The most popular banking apps in the country, including Block’s Cash App, PayPal and Chime, partner with banks instead of owning them…

Until recently, the BaaS (Banking as a Service) model was a growth engine that seemed to benefit everybody. Instead of spending years and millions of dollars trying to acquire or become banks, startups got quick access to essential services they needed to offer. [Such as FDIC-insured savings accounts, checking accounts and debit cards.] The small banks that catered to them got a source of deposits in a time dominated by giants like JPMorgan Chase…

But in May, Synapse [ a middleman, keeping track of balances and monitoring fraud], in the throes of bankruptcy, turned off a critical system that Yotta’s [the customer-facing app] bank used to process transactions. In doing so, it threw thousands of Americans into financial limbo, and a growing segment of the fintech industry into turmoil.

In a post-Synapse update, the FDIC made it clear that the failure of nonbanks won’t trigger FDIC insurance, and that even when fintechs partner with banks, customers may not have their deposits covered.

Regulators focus not on middlemen, but on the banks they partner with, expecting them to monitor risks and prevent fraud and money laundering… [end quote]

The bottom line is that people should deposit their money directly into FDIC-insured banks, not fintech apps. I use PayPal and Venmo for convenience but I don’t deposit any money into them. I have them draw directly from my checking account at a bank.

Part of the problem is that many low-income people don’t have bank accounts. Fintech gives them an opportunity to save and borrow money conveniently from their smartphones.

This is a fast-growing area of Shadow Banking that needs serious attention from the Federal Reserve, the FDIC and the SEC, not to mention the Consumer Financial Protection Agency.

Wendy (it’s always something!)

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A risk which no one seems to be addressing is that the matrix of interconnected companies can hold the “keys to the kingdom” as they need to have security clearance to access accounts, credit cards, client phones, etc. Yes, I know there is encryption,. VPN’s and so on, but the frequency that we hear of hack of supposedly sophisticated financial (and other) entities means that proactive attacks or negligence of intermediaries may introduce unanticipated financial vulnerabilities.

I once had an idea for a “middleware” application which would keep track of the various benefits of your sundry credit cards and select the one most beneficial to use for each transaction, thus maximizing the cash, frequent flyer miles or whatever according to the preferences you supply From the user’s standpoint there would be a benefit. From the app’s side, it would supply a saleable list of every transaction made with all of the user’s cards. OTOH, it would also provide a massive find for hackers unless it was very carefully crafted.

There are no free lunches, but some can be more dangerous than others.

Jeff

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I think state licenses should be in a federal clearing house for ID’ing people going into banks and other financial organizations. The organization should not have your driver’s license. The clearing house should match records and report to private enterprises if a person is who they claim to be.

If ID’s were not in the hands of private corporations things would be more secure.

By law the private corporations would not have ID’s in their record keeping.

I came up with this in response to TikTok and my own ID being hacked at one point. Before the US government got into banning TT I went to my reps to ask for a ban. TT asks for your SS numbers to do business. Most people would hand over their SS numbers. China now has millions of US SS numbers. This should not be legal for Wells Fargo never mind China.

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There are already apps like that. But you have the skill set to create something similar, I’d say jump on in with both feet. In my opinion, that space is fertile ground. Payments and rewards is a big business and it is only getting bigger. It used to be the only branded cards with rewards were things that catered to the business traveler, like airlines and hotels.

But now even mid-level grocery chains like H.E.B have their own rewards cards that not only give rewards for in-store purchases (like store cards), but also for shopping at outside merchants. There are FinTech companies that specialize in setting up the payments and rewards infrastructure for these smaller merchants, so we are only going to see more of that.

And big players, like Delta have their frequent flyer programs more about using their credit card than well, flying frequently.

That’s because Delta makes more money from their rewards program than they do by selling tickets on their aircraft. Alaska Airlines is headed in that direction too. So if you are business traveler who wants to sit in Comfort+ instead of steerage with the proles, it makes sense break out that Delta Amex whenever possible.

Banks like Chase have their own internal robust rewards programs. But what it in it for them? If you have a credit card with Chase, you are more likely to do banking in general with Chase, and get mortgages and home loans. Same with the other big banks. You can be pretty certain the smaller banks will be doing the same thing, just like the smaller grocery store chains.

I think it is near a dead certainty in that most people in the future will have multiple cards and will want to select the correct card to maximize rewards at each purchase. So if you can, I’d recommend building that app. Yep, those apps already exist, but I think the opportunity is wide open.

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…and people laff at me for writing paper checks.

…first class postage going up, 73 cents/ounce, in a couple weeks.

Steve

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Wow; my forever stamps have increased my net worth by $!!! A true four-bagger!

JimA

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The ratio of bagger weight to distance over time would be deflationary.

Hussman saw this coming.

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I have my bank cut checks for me. Cost to me is $0.00.

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Hussman has predicted twelve of the last three recessions :slight_smile:

Jeff

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I have asked him on occasion if the toilet paper has run out.

He is inaccurate and disappointing.