Smart About Money: Is My Money Safe?

By Nick Maffeo

This past May, I wrote a Smart About Money column about the failure of “banking-as-a-startup” fin-tech Synapse and how Synapse customers who thought their money was FDIC-insured learned that was not the case.

A reader asked, “What’s a fin-tech?” The words are short for financial technology and, according to IBM, a fin-tech company’s “core capability is the development and/or delivery of fin-tech products and services.” Popular apps like Venmo are one kind of fin-tech.

Nick Maffeo

Is a bank a fin-tech? While banks also use technology, the term fin-tech is generally used to describe new-ish publicly held companies whose gameplan is often to hit financial targets so they’ll be bought out.

Unlike banks, fin-techs are basically unregulated with limited oversight. Is that good or bad? As Synapse’s customers discovered, usually it’s fine until something goes wrong.

Another reader wrote in saying they had some money in a fin-tech wealth management platform and wondered if their money there was safe.

I was not familiar with the company they mentioned. But that person raised a very significant issue that most people consider no matter where their money is. They want to know, “Is my money safe?”

All banks in the United States have deposit insurance through the Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government that was created during the Great Depression to restore the public’s faith in the American banking system. The FDIC points out on its website that in the nearly 100 years since it was established, no one has lost a penny of their FDIC-insured deposits.

One year after the creation of the FDIC, the Massachusetts legislature established the Deposit Insurance Fund (DIF), which remains in operation today and insures all deposits at member banks above the FDIC limit ($250,000 per depositor per bank). Depositors in Massachusetts are lucky to have the assurance that their deposits are covered by the FDIC, with above and beyond coverage from the DIF.

Fin-techs do not have FDIC deposit insurance — though some partner with banks that do because the fin-techs are well-aware that customers look for the FDIC logo.

Through bank partnerships, some fin-techs offer super-high “FDIC coverage” amounts — into the millions — by sweeping depositors’ money into FDIC-insured banks. The fine print (which they know most people don’t read) and disclaimers are often daunting, with phrases like, “Depositors are responsible for verifying.” It can get complicated.

And as the Tennessee Valley Federal Credit Union pointed out about the collapse of Synapse, there is sometimes a “troubling reality” with fin-techs. Specifically, having a bank partner does not necessarily guarantee that customers’ money is FDIC-insured the way they think it is. Seeing an FDIC logo is not enough.

Everyone has their own risk tolerance. You need to know yours and be guided by it, even — and especially — if others are comfortable with much more or less risk than you.

If a company is paying a better rate of interest or offering extraordinary benefits or returns, it’s up to you to confirm why they’re doing that and how they can afford to do it. There could be undisclosed or not clearly explained risks, especially today with fin-techs. Not always, but often enough.

If you’re not sure, your best move may be to consult with a trusted independent local financial advisor — someone who can help you assess all the risks and also help you be sure you’re comfortable with those risks.

There’s always some risk. And it’s perfectly okay to take risks, even large ones. People do that all the time. The key is to do the due diligence so you fully understand the deal you’re being offered, including the downsides, especially for funds you can’t easily afford to lose.

Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. Have a question? Email to submissions@thecantoncitizen.com.

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