We’ve talked about fintechs before, and how they can offer some great advantages over “normal” banks. Apps or services like Yotta offer great perks for customers willing to be a bit adventurous. However, it’s not all puppy dogs and rainbows. In fact, some people are now experiencing the dark side of fintechs, and it ain’t good. Your money may not be as safe as you think it should be.
Here are Five Fast Facts on the safety of your money in a fintech:
- ⏳ It All Started When… - …Synapse Financial Technologies filed for bankruptcy. Synapse was a “banking as a service” platform, essentially a middle man between financial tech startups (fintechs) and big banks, providing all the usual banking services without the hassle of, you know, actual banks.
- 😱 Now They’re Stuck - The big problem is that around 200,000 customers who had their money invested with fintechs using Synapse cannot access it until the bankruptcy mess is sorted. That could take years, if there is any money left to recover at all. The bankruptcy judge has said there’s likely a $65-96 million shortfall. It’s such a mess that they’ve publicly called for volunteer forensic accounting help. 🤦
- ⁉️ The Big Problem - Most customers think that fintechs are protected by the FDIC, which would normally mean they should get that money back. The problem here is that FDIC protection applies to bank failures. Synapse wasn’t a bank.
- 📝 You’re Insured…Kind Of - Most fintechs have what is called “pass-through” FDIC insurance. Basically, their money is held by the bank, but it’s usually combined with cash from other fintechs. If there is a failure like this, FDIC states that if there are clear records showing who owns what money, it’ll all get returned. But – and here’s the real kicker – the bank isn’t responsible for keeping those records. It could be a middle man like Synapse. And if the middle man doesn’t track properly…too bad.
- 💡 That Gives Me An Idea - This incident has directed a very bright spotlight to fintechs in general. Some entrepreneurs are creating software and programs to help fintechs clean up their records, closing the loop on that whole record thing, and protecting normal folks in the process.
🔥Bottom line: So should you avoid fintechs entirely? Not necessarily. Fintechs have pushed banks to do more and better for their customers, and that’s a great thing. But they are a different ballgame, and you need to make sure you understand the rules before you use them. They can be a great thing, and give some great benefits for normal folks like us, just make sure you protect yourself from the risks.
Have you used a fintech before?
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