There is no FDIC for Fintech

The purpose of the FDIC is to ensure that public confidence in the banking system is not dependent on the foresight, responsibility, and effort of individual bank executives to get customers their money back in a timely manner, in the event that a bank fails.

As the Synapse situation has reminded us all, there is no equivalent to the FDIC in fintech.

This is a problem for two reasons:

1.) Generally speaking, fintech executives are less likely than bank executives to care deeply about things like operational resilience, contingency planning, and disaster preparedness.

This isn't a comment on the overall ethics of bankers vs. fintech founders, but rather an observation that in fintech (and tech broadly), the incentive is to fail fast, learn from (and tweet about) your experiences, and move on to the next thing.

To me, this means that it's even riskier than it is in banking to leave public confidence in the hands of fintech founders and executives who, when they are first starting out, may not fully appreciate the level of trust that has been placed in them.

2.) Fintech is part of the banking system.

Banks and regulators may wish otherwise, but the reality is that most consumers and small business owners don't draw a meaningful distinction between fintech companies and banks. As long as they see a bank name and the acronym "FDIC" on the website, they assume it's safe.

I can't stress this point enough - THIS IS NOT UNREASONABLE.

We can't expect customers to understand the complexities of the modern banking supply chain (sponsor banks, middleware platforms, etc.) when most of the folks working in financial services barely understand them!

What this means is that when fintech companies fail, and those failures impact end customers' ability to access their money, those failures undermine confidence in the entire banking system.

So, what do we do?

It's popular right now, in fintech circles, to say something like, "There's no inherent problem with BaaS or FBO accounts. We just need to do a better job on ledgering, reconciliation, and monitoring."

That's an understandable position, and we do need to do a much better job in those areas moving forward.

However, here's the thing - we can't allow public confidence in the banking system to depend on the foresight, responsibility, and effort of individual fintech executives, any more than we can with individual bank executives.

We need to do more.

In my opinion, there are three possible paths forward:

1. Regulators tighten the screws on banks participating in BaaS to the point where they functionally kill the market, thus preventing consumers and small business owners from having the option to place their trust in fintech companies in the first place. This would be a very bad path to go down. For all its flaws, fintech has been an undeniable force for good in the financial services industry.
2. Regulators directly supervise fintech companies to ensure that they have a much stronger focus on operational resilience, contingency planning, and disaster preparedness. This is the most logical and straightforward option, in theory. In practice, it's likely not possible for regulators to do this to the extent that we need without congressional action.
3. The fintech industry figures out how to regulate itself via a robust, well-funded self-regulatory organization (SRO) similar to FINRA. This is a moonshot, and it's unclear to me if banking regulators would be open to it (let alone be willing and able to officially sanction it), but it's an intriguing idea (first mentioned to me by Kiah Lau Haslett).