I'm guessing that you, like me, have been riveted by news stories about the Synapse bankruptcy
. Synapse makes middleware that facilitates the connection between fintechs and financial institutions, enabling fintechs to assert the availability of pass-through Federal Deposit Insurance Corporation (FDIC) insurance for customer accounts and debit cards. Somewhere in the neighborhood of 100 fintechs, including Yotto, Juno, and Mercury, have used the service.
Now, some of those customers' end-users do not have access to their funds due to complicated and twisted strands of accountability. Tens of millions of dollars are said to be missing, affecting thousands of customers.
Among the many interesting aspects of this situation: Many parties find their hands tied when it comes to helping the end-user customers of fintechs. For example,
- The bankruptcy judge may not be able to mediate a plan for distributing funds because account holders' funds are not part of the bankruptcy estate.
- Banks holding the accounts need to verify the account balances and owners before they can disburse funds.
- Banks holding the funds are sound, so there is no role for the FDIC in making account holders whole.
- Bank regulators do not directly supervise fintechs, which are not banks.
Much of this confusion, my view, has to do with that final point: Fintechs are not banks and do not necessarily offer the protections offered by banks. It is easy for customers to get confused. Just this morning, I spent time helping high schoolers understand the different protections of credit cards, debit cards, and nonbank payment apps. Clearly, it's not only young folks who require this information. In remarks on July 17, 2024, Acting Comptroller of the Currency Michael Hsu 
pointed out that chains of service providers, banks, and fintechs can result in "the public unwittingly expecting banks and bank regulators to cover problems no matter where they occur in the chain."
It's not for lack of information out there. The FDIC has warned against misrepresentation of deposit insurance coverage. The Federal Reserve previously cited one of the banks working with Synapse for deficiencies in anti-money laundering, risk management, and consumer compliance programs. The FDIC cited another for poor third-party risk management of its fintech partners. Late last week, the federal banking agencies reminded banks of the potential risks associated with third-party deposit arrangements, including inadequate access to deposit records and end-users confused about deposit insurance coverage.
That beautiful user interface, that plump interest rate, that speedy loan approval can come with a cost: It's good to know what that cost might be. Because sometimes when you move fast, things get broken. This blog posts regularly on innovations in supervision related to fintech and third- or fourth-party relationships. More to come.
By Claire Greene, Center Director in the Retail Payments Risk Forum at the Atlanta Fed