Fintech customers who believed they were protected by FDIC insurance have been left in the lurch following the Chapter 11 bankruptcy of fintech intermediary Synapse Financial Technologies. Despite the promise of FDIC insurance, customers like Lauren Scott and David Schulz are unable to access their money, and former FDIC Chair Jelena McWilliams has suggested a possible shortfall in funds between Synapse’s records and those of the banks involved. U.S. Bankruptcy Court Judge Martin R. Barash has expressed frustration at the lack of regulatory protection for these consumers, likening the situation to a crisis.
In contrast to the swift resolution after the shutdown of Silicon Valley Bank in 2023, where customers were able to access their funds within days, the Synapse case has dragged on with no clear timeline for resolution. The FDIC has stated that its insurance does not protect against the insolvency or bankruptcy of nonbank companies, leaving customers at the mercy of lengthy insolvency or bankruptcy proceedings. The complexity of the situation has led to a request for volunteer forensic accounting help, highlighting the dire need for transparency and oversight in the fintech industry.
The case of pass-through FDIC insurance, where fintech funds are held in FBO accounts at banks, adds another layer of complexity to the issue. If a bank itself fails, customers with clear records should be able to collect their insured deposits quickly, but when a nonbank fintech like Synapse collapses with deficient records, the situation becomes murky. The lack of oversight and regulation in the fintech industry has allowed for these risky partnerships to flourish, leaving consumers unaware of the true protection of their deposits.
Regulators have begun to take notice of the risks posed by bank-fintech partnerships, with enforcement actions and proposed rules aimed at ensuring compliance with consumer financial laws. The Treasury Department and the Consumer Financial Protection Bureau have called for increased oversight and transparency in these partnerships, while the FDIC has implemented new guidelines for nonbanks, including fintechs, to disclose their lack of FDIC insurance and the conditions for pass-through insurance. Fintechs like Chime have implemented systems to reconcile records daily, providing a level of transparency and accountability lacking in other players in the industry.
Entrepreneurs like Jackie Reses have stepped in to offer solutions to the compliance and oversight challenges facing the fintech industry. Reses’ Lead Bank has developed a system that reconciles bank records with fintech clients’ ledgers instantly, providing alerts for potential issues and ensuring compliance with regulations. As the fintech industry grapples with the fallout from the Synapse bankruptcy, there is a growing recognition of the need for standards and accountability to protect consumers and establish trust in the industry. It remains to be seen how the industry will adapt to these new challenges and whether consumers will be able to rely on the promises of FDIC insurance in the future.
