How to spot a credible fintech in a world with FTX and SBF fiascos 

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We’ll share how you can spot credible fintechs.

With the news of the FTX demise and arrest of their founder Sam Bankman-Fried (known commonly as SBF), it can be difficult to trust new startups and fintechs. But we’ll share how you can spot credible fintechs.  

Ultimately, credibility can be found in trust signals that are linked to government-regulated memberships and a fintech’s partner network.  

Credibility factor #1: FDIC insurance 

You’ve likely seen some fintech companies use this language: “[Company name], nor any of their affiliates is a bank, but we partner with [partner] Bank, Member FDIC.” 

This commonly used disclosure aside, language like this provides customers with two trust signals. One, that they have a partnership with an established, external bank, and two, that the mentioned bank is a member of the Federal Deposit Insurance Corporation (FDIC), which means that the FDIC regulates state-chartered banks that do not belong to the Federal Reserve System. 

Credible fintechs like Save, Chime, and Betterment use this kind of language because while they’re not banks themselves, they have forged partnerships with established banks, which are all FDIC-regulated. The FDIC is an independent government agency that protects deposits in a US bank account in case your bank fails and is forced to close down.  

Bank failures are usually rare, but times of economic uncertainty can change that. While only four have failed since 2020, the aftermath of the 2008 financial crisis saw hundreds of banks shut their doors, including Washington Mutual Bank and the Citizens National Bank. In these situations, the protection extended by the FDIC becomes a lifesaver for your money.   

The standard amount covered by the FDIC is $250,000 per depositor, per ownership category, per FDIC-insured bank. This means that if you have $250,000 or less in an FDIC-insured account, all your money is fully protected. If you have $500,000 in a joint account, your deposits would still be fully insured as each owner is entitled to $250,000 worth of coverage. 

When fintechs don’t have partnerships like this, it often means your money is not protected in the instance that the company fails, much like many fear with FTX, which is likely why several class-action lawsuits have been filed against SBF and FTX.  

Credibility factor #2: Look for SEC regulation 

When you’re investigating a fintech that offers investing-related practices, look for regulation from the Securities and Exchange Commission. Since 1933, largely in response to the market crash of 1929 that led to the Great Depression, this government-run entity’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. 

“To achieve this, we require public companies, fund and asset managers, investment professionals, and other market participants to regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest,” the SEC states online.  

“We protect investors by vigorously enforcing the federal securities laws to hold wrongdoers accountable and deter future misconduct.” 

Through the years, the SEC has kept public companies, fund and asset managers, investment professionals, and other market participants, like Save and Betterment, honest. They hold the firms that register for SEC regulation to the highest standard, which include, but aren’t limited to:  

  • The firm’s marketing and communications to customers are clear and not misleading in any way.  
  • Employees of the firm must adhere to strict guidelines, including insider trading, and not use personal accounts to misrepresent the company or their products to potential customers. 
  • Ensuring investors are provided with information relevant to a company’s financial prospects or stock price to make informed investment decisions. 

In comparison with the FTX saga, a person familiar with the SEC’s view on crypto regulation said the agency believes crypto firms, like FTX, are illegally operating outside of U.S. securities laws and instead lean on other licenses that provide minimal consumer protection to create a “patchwork of regulators,” according to Fox Business. “Those representations, while nominally true, don’t cover their activity,” the person told Fox Business

Credibility factor #3: Look for FINRA/SPIC-insured partners 

Like their FDIC-insured partners, a credible fintech may have FINRA/SPIC-insured partners. The Financial Industry Regulatory Authority (FINRA) works under the SEC to:  

  • Write and enforce rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.; 
  • Examine firms for compliance with those rules; 
  • Foster market transparency; and 
  • Educate investors. 

The Securities Investor Protection Corporation (SPIC) on the other hand, protects customers if their brokerage firm fails. It’s similar to FDIC insurance, but instead of insuring your checking and/or savings accounts at your bank, they’re protecting the securities and cash in your brokerage account up to $500,000. 

Credible fintechs like Save and Betterment have associations with both FINRA and SPIC, but in different ways. Betterment is both carrying and introducing broker-dealer registered with FINRA and SPIC, whereas, Save has a brokerage partner at Apex Clearing Corporation.  

Credibility factor #4: Who are their partners? 

Finally, learning more about a fintech’s partnership network and those partners’ credibility themselves can aid in gathering a fintech’s trust signals. Partners of Save, Chime, and Betterment include Webster Bank, N.A., Member FDIC ($65 billion in assets), The Bancorp Bank, N.A. ($6.8 billion in assets) and Stride Bank, N.A. (1.17 billion in assets), Members FDIC, and nbkc bank, Member FDIC, respectively. All of these partner banks are Members FDIC, which protects your deposits up to $250,000 per depositor, per ownership category, per FDIC-insured bank. 

Using these signals can help ensure you’re aligning yourself with credible fintech partners to manage your money. Otherwise, you’re taking a risk of losing it all, much like some FTX investors are fearful of. While the downfall of FTX is still ongoing, some customers may face $2 billion in funds lost.  

Alternatively, if they created an account with a credible fintech that has Member FDIC or FINRA/SPIC-insured partners, then they would have benefitted from the government-backed insurance and higher trust standards that FTX was allegedly not held to.  

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