Unraveling the Mysteries of Fintech Bankruptcy and Protection

What Led to Synapse's Downfall?

Synapse was founded in 2014 and received backing from venture capital firm Andreessen Horowitz. It provided a platform that enabled other fintech companies like Yotta and Juno to offer banking services without holding banking licenses. However, in April, Synapse abruptly shut down and filed for bankruptcy. This froze the funds held at partner banks and left customers unable to access approximately $265 million in balances. Six months later, the situation remains unresolved, and about $90 million of the funds is unaccounted for.

Typically, when a bank fails, the Federal Deposit Insurance Corporation (FDIC) steps in. But fintech platforms are not backed by the FDIC. Instead, they partner with FDIC-insured banks that hold customer funds in FBO accounts. Synapse was supposed to perform the bookkeeping and ensure correct account transactions. Unfortunately, the company failed to maintain an accurate and updated ledger, making it impossible to determine how the funds should be distributed.

The FDIC's Response and New Rule

In response to the Synapse failure, the FDIC proposed a new rule to strengthen recordkeeping practices for deposits received from third parties. Chairman Martin J. Gruenberg emphasized the importance of this rule, stating that it will ensure banks know the actual owners of deposits, prevent fraud, and strengthen the FDIC's ability to handle deposit insurance.

This new rule will enhance the FDIC's ability to make deposit insurance determinations and protect customers in case of a bank failure. It will also help prevent issues like the one faced by Synapse, where funds were left unaccounted for.

The World of Fintech: Neobanks and Their Features

A financial technology company typically offers banking products and services through online platforms and mobile apps. These neobanks or nonbanks do not have physical branches and bank charters. Some popular fintech companies include Acorns, Chime, Current, Lili, One, SoFi, and Varo.

Fintechs offer a more streamlined and modern approach to banking with digital tools and AI technology. They provide a limited range of products and services but focus on convenience. However, they also have some drawbacks. Lack of regulatory oversight may leave customer funds unprotected, and they may offer limited services compared to traditional banks. Additionally, relying heavily on technology and lacking in-person support can be a concern for some customers.

The Pros and Cons of Fintech

Pros of fintech include better rates and fewer fees. These companies have lower overhead costs and can pass the savings on to customers. They also offer a more innovative experience with a digital-first approach and better user interfaces. Convenience is another advantage, as all banking can be done from a computer or mobile device.

Cons of fintech include lack of regulatory oversight, limited services, and less support. The relatively new nature of the industry may leave some gaps in regulations, and fintechs may not offer the full range of services found at traditional banks. Additionally, the heavy reliance on technology can make it difficult to access cash and transfer money in a timely manner.

Protecting Your Finances with Fintech

Most major fintech companies partner with banks, ensuring that deposits are guaranteed by the FDIC up to $250,000. However, it is important to double-check insurance coverage on the fintech's website or in their terms of service. Some fintechs, like SoFi, offer higher insurance limits by spreading funds across multiple FDIC-insured banks.

Added layers of security such as multi-factor authentication, data encryption, and fraud detection services can also protect your personal information and funds. It is essential to ensure that the fintech you choose employs these best practices.

Checking Capabilities and Ratings

Before banking with a fintech company, it is a good idea to check for any regulatory actions or a high level of customer complaints. You can search the Consumer Financial Protection Bureau's database and sites like the Better Business Bureau. If the fintech is app-based, review its features and user reviews to understand any limitations.