CardsFTW #119: A Modest Proposal for Fintech Account Insurance

A Proposal: Fintech Account Insurance

Over the past few months, the story of the failure of the fintech platform Synapse has gripped both the fintech world and the broader population. Synapse’s failure led to everyday consumers losing access to millions of dollars collectively (and tens of thousands individually) in apps like Yotta, Juno, and others. From the New York Times to Planet Money’s podcast, the news of Synapse and the explanations for the failure have hit the mainstream.

Of course, this coverage is not how fintech wanted to be discussed. For years, fintech companies have used the powerful FDIC brand to create an illusion of stability around their programs that it is clear does not universally exist. While early pioneering products like Green Dot or NetSpend originally created accounts with FDIC insurance, for the past nearly 20 years, most fintech programs have created accounts with what is known as pass-through FDIC insurance.

In legal terms, pass-through insurance means that if the bank's underlying fintech programs go bankrupt, the FDIC will insure the individual depositors, whether they are direct or indirect customers via the fintech, up to $250,000 per user. Given the particular focus of most fintech programs, this means that consumers' deposits are insured from a bank failure. In turn, this coverage allows fintech programs to say things like “your funds are deposited at an FDIC-insured bank.” Many banks also insist that in the issuing statement disclaimers, fintech programs mention FDIC, as in “Banking services provided by Example Bank, Member FDIC.”

While many fintech programs have violated specific FDIC marketing guidelines, the end result is much the same: consumers have come to believe that the FDIC will save them if the fintech program goes bankrupt.

That’s not true, though, as the Synapse case shows us. FDIC insurance only applies to the underlying bank failing, not to the fintech program’s failure. For all practical purposes, there is no insurance for a fintech program. If a major fintech debit card program went bankrupt tomorrow and we lost access to the ledger, those users might also be out of their funds. While Synapse’s failures are uniquely terrible mismatched funds, no daily reconciliation, no copy of the ledger at the issuing bank), we don’t know if there are other programs that may suffer from similar problems that would lead to another situation where consumers cannot retrieve their funds.

I’d like to propose that, much like the brokerage industry, the fintech world regulates itself for success. Imagine a fintech deposit insurance program: Fintech companies would be direct members and could use statements like “Example Card is a Member of the Fintech Safety Program, your deposits are insured to $50,00.” As the FDIC does, the program could charge a fee for every dollar deposited (or perhaps transacted) to fund this insurance program. In addition, programs seeking to become members could certify to key requirements beyond the basics. While SOC2 and PCI are good standards, more modern requirements must exist, such as having ongoing penetration tests, maintaining minimum capital requirements, and even technical solutions like publishing a ledger copy to the association daily.

Deposit insurance exists beyond the FDIC when groups of community banks partner together to share just such a level of risk. There is no reason why fintech companies couldn’t do the same, although it would require a level of partnership we may not be ready for. However, if we want to regain the trust of our consumers, we may have no choice but to create such a program.

CardsWTF: Weird Chips Are Real

Last week, we covered the BoBo Finance card, which was an … interesting new card. One of the images showed a round EMV chip, and we remarked that we thought this seemed sort of fake. Well, it’s real! Hat tip to our former colleague, Kathrine McClure, who pointed us to Novoflex, which can make many fun EMV chips certified by Mastercard and Visa. I love card design, and now I can’t wait until a client says they REALLY want their card to stand out. Will it be expensive? Probably. Will it be cool and probably a first time in the US? I think so! What shape would you use?

Apple Opens Its NFC Chip

Apple announced that in iOS 18.1 it will allow third-party developers to access the Secure Element and NFC chip on its iPhones to create new wallets. To date, only Apple could create a payment wallet on its iPhones. Thanks to emerging regulations, Apple is being forced to make this move, which is really exciting.

It will be a huge uphill battle for third-party wallets to get consumers to replace the Apple Wallet with a custom one. However, there are opportunities to embed features in the wallet that make it valuable. For example, I would love my on-device wallet to be able to detect where I am shopping and use that information to automatically select the optimal card to use. Today, Apple Wallet allows you to select a default card, but it doesn’t allow programmatic changes.

Imagine a wallet that knows you are at a restaurant and picks your restaurant card. Or sees you are at a furniture store where you are likely making a large purchase and uses intelligence to avoid placing a charge on a card whose statement period ends that same day. Consumers want smart help to ensure they make smart choices at the POS, and computers are very good at this. I’ve tried to make this point to Apple before that they should embed this (maybe they should have acquired Wallaby!), but maybe someone else will do it now. I would be happy to use such an app.

I can’t wait to see what other innovators come up with once access is available.

Quick Notes and New Cards

Lots of new card news to cover in short this week.

MetaMask announced a new MetaMask debit card powered by Baanx. The card is only available in the EU and UK at the moment, and cardholders must hold their crypto on the Linea network. Crypto cards are hard because you connect an immutable ledger (crypto) to a changing ledger (cards). We’ve seen a lot fewer crypto cards lately, but they seem to be soldiering on. I’ve been watching a lot of MLS / Leagues Cups, and the X World Wallet Card is everywhere!

Santander will issue an Amazon co-brand card in Germany. Much like the UK card, the German card will earn 1% rewards on Amazon.de purchases and 0.5% rewards on purchases when paying with their Amazon Visa elsewhere.

Amazon announced new co-brand cards for the UK and EU. Barclays will issue the Amazon UK card. Interchange is much lower in the UK and EU, so these cards have substantially lower rewards than the U.S. card issued by Chase (which carries 5% cashback on Amazon purchases and often has 6-10% bonuses for slower shipping choices or special events). The Amazon Barclaycard earns 1% rewards on all Amazon purchases, 0.5% rewards on everyday spending outside Amazon for the first 12 months, and 0.25% after that, with limited bonuses of up to 2% for special Amazon events (for Prime members). 

CreditOne announced its new Credit One Bank® Wander® American Express® card. (That’s a lot of registered trademarks). CreditOne is typically considered a subprime issuer but has been moving up-market with new co-brand cards and this more premium Amex network offering. Wander American Express cardmembers earn 10X points on eligible hotels and car rentals booked through the Credit One Bank travel portal powered by Priceline, 5X points on other eligible travel, including flights, dining, and gas purchases, and 1 point on all other purchases. The card has a $95 annual fee. Points are worth 1 cent per point and don’t transfer.

The Wall Street Journal put a thinkpiece into Saturday’s paper about credit card lounges being the cool new place to hang out. Over the past decade, the lounge perk has migrated from access via programs like Priority Pass and airline partnership for airport lounges to bank-owned lounges in airports and now to bank-owned lounges outside airports. In addition, networks and issuers are building up their experience capabilities with lounges, entrances, and more at major events from the U.S. Open to Lollapalooza. All of this continues the theme of credit cards as a status symbol and membership, not just a spending tool. I would be curious to check out the New York City Platinum Lounge when I have time to kill on a visit, but it sounds like it’s a challenge to get into. Demand for lounges continues to outstrip supply.

Me, Elsewhere

Obviously, we love credit card benefits here. You can read about some interesting ones in an article I was interviewed for from US News, 11 Cool Credit Card Perks You Haven’t Heard About.

CardsFTW

CardsFTW, released weekly on Wednesdays, offers insights and analysis on new credit and debit card industry products for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi, a boutique consulting firm specializing in fintech product management & marketing. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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