Six months after San Francisco-based fintech company Synapse filed for bankruptcy, users are still scrambling to access their money, and about $90 million of customer funds is missing. Many are calling into question the legitimacy and safety of financial technology (fintech) companies.
With the rising popularity of fintechs, should you be concerned? Here’s a closer look at what led to the downfall of Synapse and what you can do to ensure your deposits are protected.
What happened to Synapse?
Founded in 2014 and backed by venture capital firm Andreessen Horowitz, Synapse provided a platform that enabled fintech companies such as Yotta and Juno to offer banking services without holding banking licenses themselves.
However, Synapse abruptly shut down and filed for bankruptcy in April, freezing the funds held at partner banks and leaving customers unable to access some $265 million in balances. Six months later, they still can’t. Worse, about $90 million is unaccounted for.
Typically, when a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in and takes control of the failed institution. The FDIC also insures up to $250,000 per account holder, per institution, per ownership category.
Fintech platforms, however, are not backed by the FDIC. Instead, they partner with FDIC-insured banks that hold the money for the company’s customers in FBO (“For Benefit Of”) accounts. This allows fintechs to manage these funds but store them elsewhere, avoiding the costs and paperwork involved in forming a new bank.
To make this system work, fintechs often need a middleman to perform the bookkeeping and ensure customer accounts are credited and debited correctly. That’s exactly what Synapse was supposed to do. Unfortunately, the company wasn’t maintaining an accurate and updated ledger, and now there’s no way to determine how those funds should be distributed.
In response to the Synapse failure, the FDIC proposed a new rule to strengthen recordkeeping practices for deposits received from third parties.
“The Notice of Proposed Rulemaking approved by the FDIC Board today is an important step to ensure that banks know the actual owner of deposits placed in a bank by a third party such as Synapse, whether the deposit has actually been placed in the banks, and that the banks are able to provide the depositor their funds even if the third party fails,” said FDIC Chairman Martin J. Gruenberg. “In addition, it will strengthen the FDIC’s ability to make deposit insurance determinations and, if necessary, pay deposit insurance if the bank fails. Further, the proposed rule will strengthen compliance with anti-money laundering and countering the finance of terrorism law.”
Understanding fintech vs. traditional banking
A financial technology company typically offers banking products and services via online banking platforms and/or mobile apps. These companies do not operate brick-and-mortar branches and do not have bank charters. They’re sometimes referred to as neobanks or nonbanks. Some popular companies you may have heard of include Acorns, Chime, Current, Lili, One, SoFi, and Varo.
Fintechs tend to offer a limited range of products and services but provide a more streamlined and modern approach to banking through digital tools and AI technology. They partner with actual banks to handle regulated activities like holding deposits or issuing loans.
Banks, on the other hand, are licensed financial institutions that often provide a full suite of financial services, both online and in person at physical branches. They are heavily regulated and need to comply with stringent banking laws and requirements.
The pros and cons of banking with a fintech company
There are quite a few upsides to fintech, as well as potential drawbacks and risks.
Pros:
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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 compared to brick-and-mortar financial institutions. These companies have less overhead and can pass those savings on to customers.
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A more innovative experience: Fintech companies take a digital-first approach to banking and put more resources into 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. While many traditional banks have adapted to offer more digital banking services, there may still be instances when visiting a physical branch is necessary.
Cons:
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Lack of regulatory oversight: Fintech companies are subject to federal regulations, but because this is a relatively new space, there may be gaps or loopholes that leave customer funds unprotected.
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Limited services: Fintechs don’t typically offer the full range of services you’d find at a traditional bank, such as mortgages, business loans, or wealth management services. It can also be more difficult to access cash 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 may be a drawback for some customers.
How to ensure your fintech deposits are safe
Given all of the issues with Synapse, you may be wary of banking with a fintech company.
Even so, most of the major players in the space are safe, reputable companies. But if you do decide to bank with a fintech over a traditional bank or credit union, there are a few important considerations:
Verify FDIC insurance
Fintechs typically partner with banks so that deposits are guaranteed by the FDIC up to the federal limit of $250,000. However, you shouldn’t assume your money is insured — always double-check that deposits you hold with a financial platform or app are indeed insured. You should be able to find clear disclosures about insurance coverage on the fintech’s website or in their terms of service.
Consider additional insurance
Some fintech companies offer higher insurance limits than the standard $250,000. SoFi, for instance, provides $2 million in insurance on customer deposits by spreading the money across several FDIC-insured banks via the SoFi FDIC Insurance Network. This can give you added peace of mind, as well as allow you to safely keep larger balances in your account.
Look for robust security features
Added layers of security such as multi-factor authentication (MFA), data encryption, and fraud detection services can help keep your personal information from falling into the wrong hands and prevent scammers from being able to access your funds. Always confirm that a fintech you’re considering employs these security best practices.
Check capabilities and ratings
It’s a good idea to double-check that a fintech company hasn’t faced any regulatory actions or a high level of customer complaints. You can search the Consumer Financial Protection Bureau’s consumer complaint database, as well as sites such as the Better Business Bureau.
If the fintech is app-based, review its features and user reviews to get an idea of what kinds of limitations you may face.