When it comes to keeping up with technological developments, the regulation of the Fintech sector sometimes struggles to keep up. In recent years, Fintech companies and online lenders have significantly increased in their presence, and from a consumer perspective, many of these online lenders look no different from a traditional bank. But as some have recently found out, these Fintech platforms carry significant risks for which banking protections may not apply.
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This past spring, one of these online Fintech platforms, Synapse Technology, went bankrupt. While this is always a concern for those in the banking world, the Synapse bankruptcy crisis introduced much larger worries. In essence, Synapse served as a Fintech intermediary for other online lenders and traditional banks. And though small in nature, these banks were insured by the federal government under FDIC protections. But as it turns out, FDIC protections do not necessarily apply when the actual banking affiliates aren’t affected. This looks to be a gray area for Fintech and online lenders that place their customers are serious financial risk. Thus, while online lenders and engaging Fintech platforms might seem less stuffy than regular banking, consumer beware. Based on the Synapse bankruptcy crisis, things are not always what they seem to be.
The World of Fintech and Online Lenders
Over the last few years, there have been a number of new options online for banking and lending. These are far from a typical brick-and-mortar banks where most Americans might apply for a loan or open a savings account. Instead, these online lenders suggest a more fun approach to banking for customers. Not only do they promote lower fees, but they also pay higher interest rates. Some even award increased amounts of earnings in a game-like atmosphere to lucky winners. This new approach to banking is becoming increasingly popular for individuals in their 20s and 30s. And despite being unique and different, these Fintech and online lenders are completely legal. But that doesn’t mean they shouldn’t be approached with caution.
A number of new Fintech startups fall within this category on online lenders. Juno, Yieldstreet, and Yotta are among some of the more popular ones. Venture capitalists have funded these companies because of their popularity. Once a customer engages these online lenders, financial assets are then sent to Fintech intermediaries, which then place funds in an actual bank. Synapse Technology represents one of these Fintech intermediaries, handling millions of dollars before the Synapse bankruptcy crisis. Synapse would then place money in smaller banks that often had no significant online presence. This was a win-win in that Fintech and online lenders connected with a FDIC bank, and small banks gained a larger customer base in the process. Plus, companies like Synapse earned fees by playing their part in this system. All was going well until the Synapse bankruptcy crisis occurred.
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The Fallout of the Synapse Bankruptcy Crisis
When the Synapse bankruptcy crisis unfolded, the issues underlying Fintech and online lenders became apparent. At the time of the bankruptcy, Synapse only held about $2 million in funds, which meant there was nearly $100 million shortfall. This meant that all the online lenders and their clients that used Synapse couldn’t access their assets. Small banks, like Evolve Bank and Trust of West Memphis, Arkansas, had some of these assets. But other small banks also held some based on Synapse’s directions. However, the precise location of any particular client’s funds wasn’t known. And this made it impossible for individuals to gain access to their financial assets. This reflected the major aspect of the crisis.
The Synapse bankruptcy crisis resulted from several developments. Certainly, lower fees and higher interest rates being paid to customers played a role. As Fintech and online lenders “played” with clients’ funds, risks were taken and shortfalls occurred. But at the same time, some banks like Evolve froze funds accessible to Synapse. Evolve reportedly did so due to suspicious discrepancies in reporting by Synapse. Both series of events meant Synapse couldn’t access funds and neither could online lenders and their clients. Understanding this, customers demanded protections including insurance protections from the FDIC. But as it turns out, Fintech and online lenders didn’t fall under the FDIC’s umbrella.
FDIC, Consumer Protections, and Fintech
At the crux of the matter was the fact that an actual bank had not failed or defaulted. Banks like Evolve continued to operate fully without fail. Since these banks were the ones actually insured by the FDIC, there was no obligations for the FDIC to act. The collapse related to the Synapse bankruptcy crisis instead involved the other fintech and online lenders. Though these lenders advertised FDIC protections via banks like Evolve, they themselves were not covered. This was because these lenders were not actually banks to begin with but instead fintech applications. To date, the FDIC hasn’t suggested they have any responsibility in the matter.
Naturally, those who lost their savings and investments don’t agree with the FDIC. As an alternative, they might instead go after fintech and online leaders. However, companies like Juno, Yotta, and Yieldstreet don’t hold any assets or funds. Neither did Synapse to any large extent. They were simply an intermediary fintech platform that relayed funds from online lenders to actual banks. That means the only target for customers in addressing their problems are the small banks working with Synapse. But paper and digital trails detailing the location of specific individual’s money has yet to be shown. How this ultimately plays out is unclear, but the FDIC doesn’t look to be getting involved. It’s a complicated situation, and one that these new fintech and online lenders have created using advanced digital technologies.
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