We at The Risk Report have been exploring entities that by all accounts (haha!) act like banks but aren’t. This week Forbes and a few others highlighted that while these companies largely are exempt from regulation, and market that as an upside, they are also very much exempt from the insurance that is afforded by said regulation.
What happened was, that Synapse Financial Technologies—a platform connecting fintech and traditional banks (banking-as-a-service)—ran out of money in April and filed for bankruptcy. It seemed Synapse had a buyer, TabaPay, ready to snap them up for close to $10mn. However, that deal fell through and left everyone in a right mess, yelling and pointing fingers in court while up to 20mn depositors are or could be frozen out of their accounts.
Synapse’s liquidity issue has caused their operations to be spotty which in turn drove one of their four traditional bank partners, Evolve Bank & Trust, to cut off customers’ access to their fintech accounts and the debit and credit cards attached because, allegedly, they couldn’t get information from Synapse about how many (if any) funds were in the accounts.
This has affected at least customers of fintech firms such as Yotta Technologies, Juno Finance, and Copper Banking and likely more.
Last week, the US Bankruptcy Court Judge on Synapse’s case, Martin R. Barash, urged the FDIC to step in and guarantee the locked-out depositors as they would any other account holder.
A representative for the Justice Department, Assistant US Attorney Elan Levey, looked into that possibility but came back with the disappointing message that the FDIC only can help when a bank fails, and Synapse is not a bank.
Evolve Bank & Trust, however, is a bank, and it could be (as Synapse CEO Sankaet Pathak has implied) that the lock-out trick cost them some trust, so it is not out of the realm of imagination that when/if people get access to their accounts, they withdraw their money fast, AKA a bank run.
But even if that—dog forbid—happens, it is all down to the small print because not all accounts are insured by the FDIC, and FDIC-insured accounts still have a cap of $250,000.
With the possibility of higher profits typically comes higher risk, and there is no such thing as a free lunch, and what goes up, must come down, and if it seems too good to be true, and all that…
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.