FinTechs, or financial technology companies, have gotten extremely popular in the last few years.
They offer bank-like services and sometimes promise some very innovative and fun features that banks don’t. Many offer higher yields than traditional banks, even some high yield savings accounts, and are appealing if you want to get a little extra.
But the last few months has highlighted a small but significant risk with these types of accounts:
- They rely on an underlying technology layer that complicates things
- They are not as regulated as banks
Recently, a company that provides the underlying technology layer, went bankrupt.
Now, millions of customers of various fintech companies, such as Yotta and Copper, can’t access their funds.
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What happened?
First, fintech companies aren’t banks. They use technology that layers on top of banks to offer additional features and benefits that go beyond what your traditional bank offers.
They always partner with an FDIC-insured bank but rely on an intermediary technology, known as “banking as a service,” to link the two. It’s a technological middle-man.
In the case of Copper and Yotta (and many others), that intermediary technology company was Synapse Financial Technologies. The bank was Evolve Bank & Trust, an FDIC insured bank (FDIC #1299) that’s been around since 1925.
It all started in 2023 when Mercury, a popular business banking fintech that used Synapse and Evolve Bank, decided to go direct and cut out Synapse.
Then, in April of 2024, Synapse declared bankruptcy and was set to be acquired by TabaPay. The deal fell through, allegedly, when Evolve failed to fully fund the accounts linked to Synapse, but Evolve wasn’t required to do that as part of their agreement with Synapse.
? A little banking background is useful here – when you deposit cash at a bank, they don’t keep all the cash in your account. They are required to keep a percentage, known as a reserve requirement, and they can do whatever they want with the rest. They usually lend it out so they can make money.
The reserve requirement is set by the Board of Governors of the Federal Reserve System and the current percentage is zero.
It seems that TabaPay is concerned that all the money isn’t accounted for because of the Mercury withdrawals in 2023. And, as the deal appeared to be falling apart, Evolve froze all Synapse-affiliate accounts when it lost access to a Synapse dashboard required to know how much each individual had in a pooled account.
? More background – when you use a fintech company, they keep track of your balances. All the funds are put into a “pooled account” at the partner bank. The fintech company gives the partner bank access to the ledger to the bank knows who has what in the account, even though it’s all (technically) in one big account. If the bank loses access to the ledger, it doesn’t know how much each person has – which is a huge problem.
It was restored later but Evolve has said it doesn’t have what it needs so the bankruptcy judge ordered Synapse provide what Evolve needs, but it seems that it’s still a work in progress.
And with Synapse having been shut down, every fintech company that uses them is stuck too. It’s gotten so bad that fintechs are giving Synapse money so it can keep operating.
Customers can’t get access to their funds because that technology layer has failed.
Who is affected?
According to their bankruptcy filings, Synapse worked with a hundred technology companies and 10 million end users and they’re all stuck in limbo.
Robert at The College Investor has a good recap and list of the major companies affected but some of the bigger ones include Copper, Dave, Juno Finance, RocketMoney, UNEST, Yieldstreet, and Yotta.
There are numerous stories of folks who have tens of thousands of dollars locked up in their accounts with very little they can do.
How could this have happened?
At first, I was a little surprised that the FDIC hasn’t stepped in and said something about this but it makes sense.
The big issue here is that FDIC insurance covers banks – but no bank has failed. Synapse is a technology company and this is essentially a dispute between a technology company and a bank.
And the Federal Reserve, which regulates banks, doesn’t regulate fintech companies – no one does. Until Evolve Bank does something wrong, regulators are unlikely to step in.
What should you do?
If you have money stuck in an account, what can you do? Unfortunately, it’s unclear what will happen next and when – hopefully Synapse and Evolve can meet and figure out how to reconcile everything so people can get access to their funds quickly.
If you’re stuck, it’s important that you download as much information about your account as possible. This includes all your banking statements so that you create a paper trail of how much money you have in the account and when.
For fintechs that are completely locked up, you run the risk of them shutting down and you losing access to your account information. They’re businesses too and if their business is in money, losing access is going to significantly hurt them.
There’s also a good chance that when access is restored, everyone will be withdrawing their money because it’s been locked up for weeks. If I had funds locked up, I’d withdraw it immediately. This may create a run on the fintech and, in aggregate, kill them but the stories of folks with their money locked up for weeks is heartbreaking.
Does this mean all fintechs are bad?
No, but this does highlight an additional risk.
This is a business situation that affected ten million Americans. Mercury cut out Synapse from their business model and opted to work directly with Evolve Bank and that threw a wrench in the works. And then Synapse went bankrupt and shut down a dashboard that Evolve needed so Evolve froze funds.
It’s just a series of bad situations that compounded into a much bigger one. If I had to pin it on a single entity, it would be Synapse and its handling of everything.
I also think that this will push regulators to increase their scrutiny on all the players in this space – fintechs, technology companies, and their banking partners.
Right now, the only regulation seems to be around language. Fintechs aren’t allowed to call themselves banks but that’s like regulating the fine print that no one ever reads.
Fintechs offer banking services but don’t call themselves banks – who really reads that closely? Who knew that tens of thousands of dollars of their funds could be frozen and neither the FDIC or the Federal Reserve would get involved?
This story highlights the risks, however small, and that these fintechs can’t be treated the same as a checking account.
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