Do you think Fintech is safe? This hidden danger could cost you dearly

Many people are understandably nervous after the high-profile failure of San Francisco-based financial technology company Synapse, which caused up to $96 million to disappear from the accounts of tens of thousands of people overnight.

Synapse filed for bankruptcy in April 2024, and nearly eight months later, many customers have yet to see the money they thought was protected by FDIC coverage. This is an extreme case, but it highlights some of the hidden dangers of relying on these increasingly popular banking options.

Fortunately, there are steps you can take to avoid fintechs (like following our Most Recommended High Yield Savings Accounts) or to protect your finances while enjoying the benefits of these applications.

What happened with Synapse?

Synapse Financial Technologies was a financial company that filed for bankruptcy in California in April 2024. It essentially acted as an accountant between fintech banking services, which are not real banks and therefore do not offer banking services. Insurance from the Federal Deposit Insurance Corporation (FDIC)-And real banks, which are insured.

This roundabout arrangement allows financial technology companies offering refined, high-value banking services without going through the time-consuming and expensive process of becoming real banks themselves. This is the underlying basis of how most fintech banking apps actually work today.

Forensic accountants and lawyers are still piecing together what happened, but it’s clear that Synapse wasn’t recording the transactions correctly. This led to account errors, leaving many customers unable to access their funds. At the start of December 2024, some customers of many fintechs still did not have access to their money, and the consequences continued to be felt.

How to avoid becoming a victim of Fintechs like Synapse

The only way to Really Avoiding a disaster like this means avoiding fintech banking altogether. You can do this by working directly with FDIC-insured banks and credit unions insured by the National Credit Union Administration (NCUA).

You may need to read the fine print. Be on the lookout for companies that advertise banking services, but don’t say they are FDIC-insured banks or NCUA-insured credit unions (some banks and credit unions offer online banking services – these are banks insured by the NCUA). not the same as third-party fintechs). These companies often clearly state that they are not banks. And be wary of any company that says it will open a deposit account in your name, or a “for the benefit of” account.

If you want to work with a fintech, it will be helpful to follow some best practices.

First, the FDIC warns against keeping the money you need for “regular living expenses” with a fintech company. Just like investing, it’s a good idea to keep a reserve funds elsewherelest something happens to your main pot. In the unlikely event that this happens, you’ll still have money to fall back on while the mess is sorted out.

Next, be careful when choosing fintech companies to work with. Here are three things you need to be very clear about when opening an account with a fintech company:

• Or your money is deposited: Check with the FDIC BankFind tool that the fintech partner bank do have FDIC coverage. Avoid fintech companies that partner with banks you already use, as you may find yourself beyond FDIC coverage limits.
• When your money is deposited: It is only insured after the actual transfer. Look for fintechs that immediately transfer your money to an FDIC-insured bank.
• How your deposits are recorded: Verify that the fintech company has a way to record the specific amounts belonging to each person at each bank they use. If it can’t track it, you might have trouble getting your money even if your funds are in an FDIC-insured bank.