The recent bankruptcy filing of Synapse, a company that powered many Banking-as-a-Service programs for fintechs, has left customers at risk of losing hundreds of millions of dollars of deposits. This highlights the risks associated with entrusting intermediaries to handle your cash – a risk that I warned about more than a year ago in the wake of the collapse of Silicon Valley Bank. I also had similar concerns during the Financial Crisis, when I learned first-hand the importance of holding cash directly in your own bank accounts.
In March 2009, amidst the depths of the Financial Crisis, I faced the potential failure of my bank and the safety of my hard-earned money. Up until that point, keeping my money at one of the largest banks in the country seemed secure. However, as my bank teetered on the brink of collapse, reality set in. If my bank were to fail, any funds in excess of the FDIC insurance limit would leave me as an unsecured creditor. I was at risk of losing the money for which I had worked so hard, and that I had been saving to buy a home and for my children’s education.
Looking for a Solution
I sought solutions and consulted with my banker who suggested a brokered deposit program, where I would be eligible for excess FDIC insurance protection. These are often called “cash sweep” programs, promising increased FDIC insurance coverage with ease. But when I read the fine print on how their program actually worked, I came away terrified. While these structures are marketed as safe and liquid, it turns out that your funds might not be fully insured as advertised, nor are they necessarily liquid, meaning you might not be able to access your money when you need it most.
Depositors are learning this lesson the hard way with this year’s bankruptcy of Synapse, which has left customers who thought their funds were safe scrambling to locate hundreds of millions of dollars that are currently inaccessible. People trusted that anything advertised as FDIC-insured must be safe. But there’s a big difference between safety and liquidity.
Getting Under the Hood
These program bank solutions all work pretty much the same way. You give your money to a brokerage firm or fintech company that serves as an intermediary, promising to spread your cash across multiple banks to obtain increased FDIC insurance coverage. Sounds simple enough. But what actually happens in the background is much more complicated. The intermediary sets up a single master account at each program bank, called an omnibus account. Into that account they place your money, commingled with the money of every one of their other customers. The intermediary then maintains a central ledger, or master list of all of their customers whose funds have been pooled together into that single account. That central ledger is the only record of how much of that pooled money belongs to you. Therein lies a key risk: if the ledger is lost or becomes corrupted, no one knows how much money really belongs to you. And if the intermediary goes bankrupt, even if the ledger is clear it could still take days or weeks to sort everything out and get your money. In short, you’re much better off keeping your own money in your own bank accounts.
Conflicts of Interest
Given all of the risks, why are so many of these cash sweep programs structured this way? These programs allow brokerage firms and other fintechs to collect a ‘scrape’ — a fee for themselves — and deliver to clients a ‘net yield.’ It sounds innocuous, but essentially enables brokerage firms to market these programs as “free” when they are by no means free. The fee is just hidden from the depositor. These programs have turned into a major profit center for broker-dealers and fintechs. Today, some of the leading brokerage firms earn more than 50% of their profit from the spread that they earn on your cash, re-selling your funds to other banks for their own profit.
The irony is that the inherent conflict of interest in traditional cash sweep programs actually reduces the interest that you stand to earn on your cash. Moreover, it exposes you to three key risks:
Risk #1: By enabling an intermediary to take your cash and re-sell it to other banks, you lose direct visibility over, and access to, your funds, meaning that you may not be able to access your money when you need it.
Risk #2: You’re relying on that intermediary to keep an accurate record of which funds belong to you, and where they are held.
Risk #3: You lose the ability to maintain a direct relationship with the banks that hold your cash, so if there’s ever an issue, you may have no recourse.
A Better Solution
When I read the fine print back in 2009, I concluded that none of these program bank solutions were safe enough to trust. I decided to open my own accounts at multiple banks and manage these accounts myself. This way, all funds would be held directly by me, in my own name, in my own bank accounts. I could choose the banks. I would know exactly where my money was each day, and could move it or withdraw it on a moment’s notice. There was no intermediary standing between me and my funds, so there was no single-point-of-failure risk. I discovered that not only could I increase FDIC insurance coverage, but through the efficiencies of online banking, I could also earn higher yield at the same time. A true win-win.
After three years of manually managing these accounts myself, it occurred to me that there ought to be a way to streamline this process. I left the bank where I worked and started working with a team of smart engineers. Together, we figured out how we could make it simpler for individual depositors to open multiple bank accounts at once and manage these accounts from a single screen without having to login to each of the accounts individually. All the funds would still be held in separate bank accounts, but the funds could easily move to whichever bank(s) were willing to pay the highest yield each month. We launched Max to enable everyone to benefit from this safer way to manage cash. Along the way we were granted five U.S. patents for our novel approach.
Over the years, we’ve streamlined and simplified our service further, making it easy to open multiple new high-yield savings accounts in as little as 2 minutes. We’ve built integrations into the leading tools used by wealth management firms and earned the trust of financial advisors at more than 3,000 wealth management firms nationwide. Today, our clients are earning up to 5.41%, which is more than a percentage point higher than the rates advertised by leading online banks and 12x the national savings average1, because we’ve been able to strip costs out of the system, reducing customer acquisition costs for banks so that they could afford to pay higher yield to their clients. There are no hidden fees, and clients hold all of their funds directly in their own names in their own bank accounts.
Summary
Cash is an important asset class. Everyone keeps some amount of cash on hand to pay their monthly bills. But beyond that, cash is really there for safety and liquidity. Some people store up an emergency fund to pay unexpected bills or manage through career transitions. Others stockpile cash to be ready to capitalize on dips in the stock market, or to commit money to private equity or venture capital funds. Whatever the reason you hold cash, it should always be safe, liquid, and earning the highest yield possible.
The best way we’ve found to accomplish all three goals is with Max. With Max, there’s no intermediary, no omnibus account or separate ledger, and no middleman taking a hidden scrape. Max is just your own money held directly in your own bank accounts, with a little intelligence mixed in to help you ensure your money is always earning the highest yields and kept within the FDIC insurance limits at each bank.
To get started, ask your financial advisor to help you earn the highest yields on your cash with Max, or visit MaxMyInterest.com.
1 Source: FDIC.gov. National Savings Average of 0.45% as of July 12, 2024.