Fintech
CFPB’s Rohit Chopra: ‘Moving Fast and Breaking Things’ May Not Work in Fintech
The “rent-a-bank” model, which spawned a generation of fintech startups but is now at the center of a fiasco that has frozen hundreds of millions of dollars in customer deposits, needs closer scrutiny, the top U.S. consumer finance regulator told Semafor.
“There’s a ‘move fast and break things’ mentality” in fintech, said Rohit Chopra, director of the Consumer Financial Protection Bureau, a financial industry watchdog. “In some circumstances, it’s OK. In other circumstances … it’s just catastrophic.”
He was talking to a traffic light event Wednesday in Washington about the recent collapse of Synapse, a financial intermediary used by fintech apps to offer bank accounts to their users. Its failure in April broke a key link in the largely invisible chain that connects users of popular financial apps to their money, and left 100,000 people without access to about $265 million.
The mix-up has highlighted a characteristic that is obvious to fintech apps, but little understood by customers and not well covered by existing regulations: They are not banks. Instead, they essentially rent an existing bank’s charter and white-label accounts. In recent years, they have attracted customers by offering attractive interest rates and gamified investment services.
Chopra said the CFPB has “long had a problem with rent-a-bank models.” He declined to say whether the agency was investigating Synapse’s collapse, but called it a “clear and serious error in judgment.”
A handful of small regional lenders advertise aggressively on financial apps, including the one at the center of Synapse’s collapse: Arkansas-based Evolve Bank & Trust, whose bank accounts were offered through apps with names like Yieldstreet and Yotta. Customers interacted with the apps, Evolve held their money, and Synapse sat in the middle, keeping track of whose funds were where.
When Synapse filed for bankruptcy this spring, it shut down a critical system used by Evolve, freezing about $265 million in total funds and leaving customers, most of whom have never heard of either company, hanging in the wind. Court filings have done little to clarify the situation. Synapse says Evolve owes end users 50 million dollars in deposits, according to Fintech Business Weekly. Evolve has questioned the accuracy of Synapse’s records, essentially saying it lost track of tens of millions of dollars.
“It’s not enough for a bank to have a clause in their contract that says the partner will do X, Y, and Z,” FDIC Board Member Jonathan McKernan told Semafor. “The bank has to actually monitor that the partner does X, Y, and Z… And that doesn’t happen very often, frankly.”