Is FDIC insurance a guarantee of safety Indepth analysis of the downfall hidden risks and regulatory black hole of Fintech startup Synapse
Fintech startup Synapse announced bankruptcy earlier this month, affecting hundreds of fintech companies and hundreds of thousands of users. On one hand, it was found to have nearly $100 million in funding gaps with banking partner Evolve. On the other hand, claims that user funds were insured by the Federal Deposit Insurance Corporation (FDIC) were refuted as not falling under FDIC coverage. Now, the bankruptcy liquidation process is at a standstill.
Synapse, founded in 2019, provided Banking-as-a-Service (BaaS) including instant payments, credit cards, and debit cards, allowing numerous startups to embed Synapse’s banking services into their products. It also acted as a financial intermediary between multiple banks and tech companies.
However, with economic downturns, Synapse faced difficulties in 2023 and filed for liquidation under U.S. bankruptcy law in April of this year, leaving thousands of businesses and their users facing financial issues due to Synapse’s collapse.
Yotta Savings, a fintech app popular among U.S. households since 2019 for its unique lottery incentive system offering cash rewards, savings interest, and financial cards, claimed that user funds were protected by FDIC. However, following Synapse’s bankruptcy, it was revealed that approximately 200,000 fintech app users, including 85,000 Yotta users, with funds totaling up to $112 million, were not covered under FDIC as insured accounts.
The regulatory uncertainty between fintech companies and banks highlights potential risks for users. Despite offering bank-like services, many fintech companies, often partnering with smaller or less regulated banks, may not adhere to rigorous oversight or registration requirements. This situation underscores the need for caution when selecting fintech services, particularly regarding the extent of FDIC coverage and regulatory gaps.
In conclusion, while fintech companies drive innovation, consumers and investors must remain vigilant given the risks associated with such services, including incomplete FDIC coverage and regulatory ambiguities that can exacerbate financial vulnerabilities.
FDIC, fintech, Synapse, Yotta, regulatory issues, bankruptcy, financial technology
