Collapse of Synapse Highlights Need for Neobanks and Traditional Banks to Choose Stable Partners
- Neobanks are gaining popularity
- Certain accounts are not FDIC-insured
- Bank consumers are being transferred into vulnerable accounts without notice
The American Prospect features a rather alarming story illustrating the higher risk faced by neobanks as compared to conventional financial institutions, and the dangers for FIs partnering with unstable companies.
One example: because so much fintech architecture remains unregulated, federal officials have been unable to step in to extricate customers from the failure of middleman Synapse, which has led to hundreds of thousands of customer accounts being frozen at various fintech companies like Yotta, Juno, and Copper.
One user said they had “over $60,000” tied up in an account that was unreachable. Another, a single mom, had just bought a home and couldn’t access the funds to make the first mortgage payment. A third had saved emergency funds for their family: “I feel powerless and unable to do anything. I’m so upset.”
Transferred Without Notice
The primary problem, reports American Prospect, appears to involve customers with direct Synapse brokerage accounts, into which they were involuntarily transferred last year from FDIC-insured deposit accounts.
Synapse brokerage accounts, it should be noted, are not intended to function as bank accounts.
The situation reveals the extreme reliance fintech startups have on technology and banking partners, which help them stand up apps quickly but add unnecessary risk when problems arise.
The fintech business model of relying on unregulated middlemen like Synapse has led to this crisis, where customers are unable to access their funds due to disputes between the various companies involved.
FIs Need to Partner with Stable & Reputable Companies
Neobanks are not going away anytime soon. However, their reliance on third party technologies that can essential remove access to customer funds is a stark reminder that financial institutions need to be wary of the companies with whom they partner.
There are upstart fintechs popping up each week. And, while they will invariably present themselves as stable organizations, partnering with them presents major risks (as seen with the example above).
Even long-established organizations are seeing turmoil these days, reflected in major changes with their leadership and shaken investor confidence.
OrboGraph has been a partner of financial institutions for nearly 30 years. FIs, service bureaus, leading fraud technology platforms, and fintechs choose to partner with OrboGraph for the following reasons:
- Steady leadership for over a decade
- Profitability each year, showing operational stability
- Track record of cutting edge technology development for both check processing and check fraud detection
All reinforcing our reputation as a stable partner that will continue to focus on their needs.