Financial Technology’s Interconnected Relationship Chains and Responsibilities

I imagine that you, like me, have been fascinated by the news regarding the Synapse Bankruptcy. Synapse builds middleware that facilitates the connection between fintechs and financial institutions, allowing fintechs to assert the availability of Federal Deposit Insurance Corporation (FDIC) pass-through insurance for customer accounts and debit cards. About 100 fintechs, including Yotto, Juno, and Mercury, have used the service.

Now, some of those clients’ end users are without access to their funds due to complicated and convoluted liability lines. Tens of millions of dollars are said to have disappeared, affecting thousands of clients.

Among the many interesting aspects of this situation: many parties find themselves with their hands tied when it comes to helping fintech end customers. For example,

1. THE bankruptcy judge may not be able to broker a plan for the distribution of funds because the account holders’ funds are not part of the bankruptcy estate.
2. Banks Account holders must verify account balances and owners before funds can be disbursed.
3. Banks The funds are sound, so the FDIC has no role in compensating account holders.
4. Banking regulators do not directly supervise fintechs, which are not banks.

Much of this confusion, I think, has to do with that last point: Fintechs are not banks and do not necessarily offer the protections that banks do. It’s easy for customers to get confused. Just this morning, I spent time helping high school students understand the different protections for non-bank credit cards, debit cards, and payment apps. Clearly, it’s not just young people who need this information. In remarks on July 17, 2024, Acting Comptroller of the Currency Michael Hsu He stressed that chains of service providers, banks and fintechs can lead “the public to unwittingly expect banks and banking regulators to fix problems, no matter where they occur in the chain.”

It’s not for lack of information out there. The FDIC has warned against false declaration of deposit insurance coverageThe Federal Reserve has previously sued one of the banks that work with Synapse for shortcomings 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, federal banking agencies reminded the banks of the potential risks associated with third-party deposit arrangements, including inadequate access to deposit records and end-user confusion about deposit insurance coverage.

That beautiful user interface, that high interest rate, that fast loan approval can come at a cost – it’s good to know what that might be. Because sometimes when you move fast, things break. This blog regularly posts about innovations in supervision related to fintech and third or fourth parties relations. And there’s more.

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