Six months after San Francisco-based financial technology company Synapse filed for bankruptcy, users are still struggling to access their money and about $90 million in customer funds are missing. Many question the legitimacy and safety of financial technology (fintech) companies.
Faced with the growing popularity of fintechs, should we be worried? Here’s a closer look at what led to Synapse’s downfall and what you can do to ensure your deposits are protected.
Learn more: What is fintech?
Founded in 2014 and backed by venture capital firm Andreessen Horowitz, Synapse provided a platform that allowed fintech companies such as Yotta and Juno to offer banking services without holding banking licenses themselves .
However, Synapse abruptly closed its doors and filed for bankruptcy in April, freezing funds held at partner banks and leaving customers unable to access some $265 million in balances. Six months later, they still can’t do it. Worse still, around $90 million is missing.
Typically, when a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in and takes control of the failing institution. The FDIC also insures up to $250,000 per account holder, per institution, and per ownership category.
However, Fintech platforms are not supported by the FDIC. Instead, they partner with FDIC-insured banks that hold the company’s customers’ money in FBO (“For Benefit Of”) accounts. This allows fintechs to manage these funds but store them elsewhere, avoiding the costs and paperwork required to create a new account. bank.
To make this system work, fintechs often need an intermediary to do the accounting and ensure that customer accounts are correctly credited and debited. This is exactly what Synapse was supposed to do. Unfortunately, the company did not maintain an accurate and up-to-date ledger, and there is now no way to determine how these funds should be distributed.
In response to Synapse’s failure, the FDIC proposed a new rule strengthen recordkeeping practices for deposits received from third parties.
“The Notice of Proposed Rulemaking approved today by the FDIC Board is an important step in ensuring that banks know the true owner of deposits placed in a bank by a third party such as Synapse, if the deposit was actually placed in the banks, and that the banks are able to provide their funds to the depositor even in the event of default by the third party,” said FDIC Chairman Martin J. Gruenberg. “Additionally, it will strengthen the FDIC’s ability to make deposit insurance decisions and, if necessary, pay deposit insurance in the event of a bank failure. Additionally, the proposed rule will strengthen compliance with the Anti-Money Laundering and Anti-Terrorism Financing Act.
Learn more: What is the FDIC and how does it work?
A fintech company typically offers banking products and services through online banking platforms and/or mobile applications. These companies do not operate physical branches and do not have a banking charter. They are sometimes called neobanks or non-banks. Some popular companies you may have heard of include Acorns, Chime, Current, Lili, One, SoFi, and Varo.
Learn more: What is a neobank and is it safe?
Fintechs tend to offer a limited range of products and services, but offer a more streamlined and modern approach to banking using digital tools and AI technology. They partner with real banks to manage regulated activities such as holding deposits or issuing loans.
Banks, on the other hand, are licensed financial institutions that often provide a full range of financial services, both online and in person at physical branches. They are heavily regulated and must comply with strict banking laws and requirements.
Fintech has many advantages, as well as potential disadvantages and risks.
Benefits :
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Better rates and fewer fees: You may have noticed that fintech products come with more competitive interest rates and lower fees than brick-and-mortar financial institutions. These companies have less overhead and can pass those savings on to their customers.
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A more innovative experience: Fintech companies are adopting a digital-first approach to banking and dedicating more resources to developing and improving their online user experience.
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Convenience: When you bank with a fintech company, all of your banking can be done from your computer or mobile device. Even though many traditional banks have adapted to offer more digital banking services, there may still be instances where it is necessary to visit a physical branch.
Disadvantages:
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Lack of regulatory oversight: Fintech companies are subject to federal regulation, but because it is a relatively new space, there can be gaps or loopholes that leave customer funds unprotected.
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Limited services: Fintechs generally do not offer the full range of services found at a traditional bank, such as mortgages, business loans or wealth management services. It may also be more difficult to access liquidity and transfer money to external accounts in a timely manner.
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Less support: A heavy reliance on technology and lack of in-person support can be a disadvantage for some customers.
Given all the problems with Synapse, you may be wary of banking with a fintech company.
Despite this, most of the major players in the industry are safe and reputable companies. But if you decide to go with a fintech rather than a traditional bank or credit union, there are some important considerations:
Fintechs typically partner with banks so that deposits are guaranteed by the FDIC up to the federal limit of $250,000. However, you should not assume that your money is insured: always check that the deposits you hold on a financial platform or app are properly insured. You should be able to find clear information about insurance coverage on the fintech’s website or in its terms of service.
Some fintech companies offer higher insurance limits than the standard $250,000. SoFi, for example, provides $2 million in insurance on customer deposits by spreading the money among multiple FDIC-insured banks through the SoFi FDIC Insurance Network. This can give you greater peace of mind and allow you to safely maintain larger balances in your account.
Learn more: Fintechs Take Advantage of Concerns Over Limited FDIC Deposit Insurance
Additional layers of security such as multi-factor authentication (MFA), data encryption and fraud detection services can help prevent your personal information from falling into the wrong hands and prevent fraudsters from accessing your funds . Always confirm that a fintech you are considering uses these security best practices.
Learn more: 6 Important Security Features to Look for in a Bank
Check capabilities and assessments
It’s a good idea to check that a fintech company hasn’t been subject to any regulatory action or a high level of customer complaints. You can search the Consumer Financial Protection Bureau website consumer complaints databaseas well as sites such as the Better Business Bureau.
If the fintech is app-based, look at its features and user reviews to get an idea of the types of limitations you might face.