Government agencies that people admire are few and far between.
But there’s one standout – the Federal Deposit Insurance Corporation (“FDIC”).
Since 1933, the FDIC has served as a stabilizing force in the U.S. banking system. For each insured bank, it provides deposit insurance covering $250,000 per depositor, per ownership category.
Put simply, the FDIC lets us all sleep better at night. Unless you have a ton of money in the bank, you know your deposits are safe.
And even the most tech-savvy consumers understand that. These are the kind of people who would turn their money over to an app on their phone.
To them, the app is fine. But they still want FDIC protection.
That’s why earlier this year, the collapse of a little-known financial technology (“fintech”) startup caught lots of those folks by surprise…
If you’ve never heard of Synapse Financial Technologies, you’re lucky. Synapse was a Silicon Valley startup that set out to revolutionize finance.
Synapse offered what it called Banking as a Service (“BaaS”). In plain English, that means taking other people’s money and depositing into in a bank. Essentially, the firm served as a middleman.
Synapse’s customers were fintech companies like Relay, Cleo, Dave, Yotta, and Stilt. They all – Synapse included – had backing from big Silicon Valley venture investors.
They all also had a common mission – disruption. The goal was to make traditional banks a thing of the past.
But like many “disruptor” startups, they ran into the world’s oldest roadblock – regulation. They couldn’t give customers an FDIC guarantee unless they were a bank… or unless the money was in a bank.
The last thing these startups wanted to be was a bank. That would mean regulation. And that’s where Synapse came in…
When users put money in the startups’ apps, Synapse took that money and deposited it into an FDIC-regulated bank. When users needed their money, Synapse transferred the money back to the apps.
Synapse gave the disruptors credibility. And users thought they were getting FDIC insurance.
But as it turned out, for a company whose job was to move money around, Synapse wasn’t very good at keeping books…
Things started to unravel last year. The banks Synapse had money with noticed first.
There were discrepancies and disagreements over payments. The banks began ending their relationships with the company.
Then in April of this year, Synapse declared bankruptcy. It first filed under Chapter 11, but things were so bad that it turned to Chapter 7 liquidation in May.
In Synapse’s liquidation, some $85 million went missing. The fintech customers believed they had $265 million in balances. The banks associated with those accounts said they only had $180 million.
Synapse said it had more than 100 fintech customer relationships. And those relationships touched potentially 10 million customers. It’s unlikely that the numbers are that bad, but it’s still a huge mess.
And the worst is, this is all going to take a while to work out.
Synapse never was a bank. Because of that, neither the Federal Reserve nor the FDIC can help. No bank failed, so there’s no FDIC insurance to be had.
Those disruptors certainly bypassed regulations. But the customers ended up taking the loss.
As the legendary Warren Buffett once said, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” And with that in mind, the lesson here is clear…
Those exciting-sounding fintech startups with flashy apps attracted plenty of folks looking to bypass traditional banking. But the Synapse debacle shows how important it is to have actual FDIC insurance with a real bank.
Because of that, banks are still here to stay. And according to the Power Gauge, bank stocks look great right now…
We can track the bank subsector in our system through the SPDR S&P Bank Fund (KBE). Right now, it earns a “bullish” rating. And it’s currently ranked No. 2 out of 21 subsectors.
Meanwhile, the regional banking subsector – which we track via the SPDR S&P Regional Banking Fund (KRE) – looks even stronger. It holds the top spot out of 21 subsectors right now. And it also earns a “bullish” rating in the Power Gauge.
So despite what the next fintech startup might have you believe, banks aren’t going away anytime soon…
And the Power Gauge sees upside ahead for both the bank and regional banking subsectors. If you aren’t already paying attention to these corners of the market, I recommend taking a look.
Good investing,
Joe Austin
