Insights: FDIC Coverage

A Cautionary Tale of Counterparty Risks

Over the past 15 years, the increasing ubiquitousness of financial technology (“fintech”) —  including mobile payments, digital currencies, blockchain, and peer-to-peer lending, just to name a few — has heralded a new era of how people manage their money.  Such innovations, spearheaded by non-bank entities, have afforded consumers convenience, efficiency, accessibility, and choice.  Against this backdrop of an ever-evolving landscape, brick-and-mortar institutions and government regulators alike have been busy playing catch-up, as walls around the traditional financial and banking system become progressively deconstructed.

Notwithstanding the aforementioned benefits wrought by fintech, the recent collapse of Synapse, a little-known middleware firm whose services allowed other businesses to embed banking services into their own offering, illustrates the fragility of the fintech ecosystem.  While the extent of the bankruptcy’s cascading impact remains to be fully revealed, a recent report suggested that more than100,000 fintech customers, with $265 million in deposits, have been locked out of their accounts since mid-May.  Furthermore, consumers should be aware that when opening an account with a non-bank entity, such deposits may not be protected by the FDIC coverage.

Do you know your counterparty risks when placing your hard-earned dollars?