Fintech
The failure of Synapse is no one’s responsibility and everyone’s problem
From left: Michael Barr, vice president for oversight at the Federal Reserve; Martin Gruenberg, president of the Federal Deposit Insurance Corp.; and Michael Hsu, acting director of the Office of the Comptroller of the Currency, were sworn in during a House Financial Services Committee oversight hearing in May. The failure of fintech middleware company Synapse has left thousands of customers unable to access their funds, and regulators have so far said little about their plans to address the problem, or the limitations that stand in the way.
Bloomberg News
It wasn’t long after I started dating the woman who would become my wife that I decided she was the one for me. She was (and is) beautiful, interesting, and much smarter than me, and I decided that if things didn’t work out it wouldn’t be because I didn’t know how I felt about her or what I wanted our future to be. To be.
So I started saving for an engagement ring, but to do so I first had to get out of modest credit card debt, moving the goalposts a little further. More importantly, I had to develop the habit of saving my money, which I did Very gradually over the course of about four years. When I finally proposed to her, I was obviously thrilled that she said yes. But I was also proud of myself for setting a financial goal and achieving it—it made me feel like I’d proven something to myself as we continued our journey together.
When I read Claire Williams’ story about fintech customers who can’t access their savings due to bankruptcy from fintech middleware company Synapse, I was transported back to that time when I was struggling to save just a little here and there and how precious that nest egg was to me – and what it represented. So it wasn’t difficult to feel the frustration that those customers must feel for having done something difficult only to be disappointed by some bureaucratic hitch that no one seems able to explain or resolve.
American Banker readers perhaps know better than most what deposit insurance is and how it works, so let me spoil you while I recap: Deposits at a bank – located in checking or savings accounts – are federally insured until $250,000 per account. That The policy was adopted during the Great Depression, but was still hard-won – the government decided that people did not need to worry about whether their banks were solvent or not, because they had recently discovered that concerns about a bank’s solvency were a proximate cause of actual bank insolvency.
Fintechs, meanwhile, are not banks and do not accept deposits and are therefore not insured. But they often serve as a customer-facing business can help people achieve their financial goals by helping them build their credit and manage their money and get used to saving. But the back-end deposit-taking capabilities are handled by banks, which offer that service for a fee – what has become known as banking as a service, or BaaS. Regulators have lately they have become more scathing in their criticism of bank-fintech partnershipsIncluded issue a cease-and-desist order against Evolve Bank, one of Synapse’s partner banks — requiring them to improve third-party risk controls and prohibiting the bank from entering into new fintech partnerships without regulatory approval.
It may seem like too little, too late, and for customers whose money is in limbo, it probably is. But it is also a reflection of the limited actions banking regulators can take against nonbanks, at least in the short term. One might compare the extraordinary actions taken by regulators after last year’s bank failures unfavorably with the tepid response to Synapse’s collapse, but regulators simply don’t have the same tools to intervene in the latter case — and even if they did, they probably they would not want to set a precedent whereby failed fintechs get bailouts or special treatment. So, for fintech customers caught up in Synapse’s collapse, the ball is unfortunately in the bankruptcy court, meaning resolution will likely be exasperatingly slow.
But there are things regulators can still do to fill the gaps that led to this fiasco, on the one hand and let customers know that regulators feel their pain on the other.
Regarding the first point, regulators have been doing small things to address this problem for some time. Apart from the aforementioned enforcement actions taken against banks for supervisory deficiencies in their fintech partnerships, the The Federal Deposit Insurance Corp. has been increasingly diligent in enforcing its rules on the representation of deposit insurance AND reporting the rules of the road for such representation by fintechs in recent years. The Consumer Financial Protection Bureau, which has a broader mandate than other banking regulators, may also have a role to play if fintechs’ deposit insurance claims constitute an unfair, deceptive and abusive practice.
But on that last point, what has been missing – at least so far – is some sort of recognition from the people in power that Synapse’s failure highlights a gap and they are on the case. Ordinary people – unlike the extraordinary readers of American Banker – have in many cases decided to do business with fintechs with the knowledge that their money would be as safe with them as it would be with a bank, and this has proven not to be the case. necessarily be TRUE.
People trust the financial system more than they understand it, and that’s by design: the whole reason we have deposit insurance in the first place is so people can live their lives assuming that their money they will not disappear. Synapse’s failure shatters that trust, and that’s a problem that needs to be resolved quickly, particularly for those who are already on the periphery of the financial system and to whom fintechs often sell themselves.
Whatever happens from a regulatory or enforcement perspective – or legislative, for that matter – will take time. But there are thousands of people out there right now whose money has actually disappeared and who feel like no one sees them or doesn’t care. This is an experience that could worsen the future of their financial and banking relationships, unless they get the message that help is on the way.