Fintech

“I have nothing left”: life inside the synapse collapses

Published

10 months ago

25 June, 2024

“I have nothing left”: life inside the synapse collapses

Jelena McWilliams, a bankruptcy trustee at Synapse Financial and former president of the Federal Deposit Insurance Corp., said the fintech middleware company’s bankruptcy in April was “devastating” for ordinary customers.

Bloomberg News

WASHINGTON – At this point, Imene Haddad feels like she’s tried everything.

His account with the fintech app Juno – which contained about $26,000, his entire life savings – froze last month. She, along with tens of thousands of others affected by the bankruptcy of fintech middleware company Synapse they found themselves unwittingly forced to navigate the challenge of unknown Washington agencies while trying to recover money that, in many cases, they thought was safe.

Haddad, the 39-year-old single mother from West Palm Beach, Florida, had a mortgage that was due, and the bank that she said held her funds — Evolve — couldn’t allow her to access them.

She contacted the Consumer Financial Protection Bureau, thinking that, surely, a consumer protection agency would be able to help her regain access. The CFPB referred it to the Federal Reserve (which regulates Evolve). The Fed sent it back to court to deal with the Synapse bankruptcy case.

He has tried his lawmakers — Sen. Marco Rubio, R-Fla., in particular. Haddad said he has not received a response from his office. (Rubio’s office did not respond to American Banker’s request for comment.)

“I’m running out of ideas on who to contact,” he said. “I’m terrified, because this is everything I’ve worked for my whole life.”

Haddad’s savings are implicated in the increasingly complicated bankruptcy case of Synapse, which served as an intermediary between customer-facing fintech apps and FDIC-insured banks.

The case, needless to say, was difficult. There is an estimated $85 million shortfall between what Synapse’s former partner banks hold and what consumers are entitled to. according to documents filed with the court by Jelena McWilliams, a Chapter 11 bankruptcy trustee and former president of the Federal Deposit Insurance Corp.

Just last week, Evolve filed a letter with the bankruptcy court that $109 million in deposits for another fintech app called Yotta have vanished in synapse collapse. Evolve and Synapse can’t agree on who is responsible for Yotta’s missing funds or frozen accounts.

McWilliams on Thursday took the unusual step of asking U.S. banking regulators to provide resources and aid communication between banks and consumers. The failure, for ordinary consumers, he said, was “devastating.”

Until these discrepancies are resolved, people like Haddad will be forced to wait.

Hymen Haddad Imene Haddad, of West Palm Beach, Florida, has about $26,000 in an account at fintech Juno that she has been unable to access since the collapse of fintech middleware provider Synapse in April. Thousands of fintech customers across the country have been locked out of their accounts after the Synapse collapse and have been unable to find anyone who can definitively tell them if and when they will get their money back, exposing regulatory gaps among banks and their fintech partners.

Hymen Haddad

“I didn’t expect this to happen in this country because I thought we were protected from something like this,” Haddad said. “He shook my faith. I have nothing left.”

Who will you call?

Patty Newman, who asked to use her maiden name, created an account through Yotta in 2022, attracted by the interest rate offered on her savings compared to what she could get with a traditional savings account.

“My frozen funds are my emergency fund — money I can use when things break or something goes wrong in life,” she said. “It took about two years of saving to get that little emergency fund together. It’s not a lot, certainly not what an emergency fund should be, but it’s a good start and it’s important to have.”

Newman liked that Yotta encouraged her to save. She also liked that Yotta told her that her money was insured by the FDIC.

“I feel like I did my due diligence: I researched Yotta, made sure it was FDIC insured, as advertised, and read reviews and articles about it,” he said.

But, as Newman, a retired teacher, and many others would learn, FDIC insurance only comes into play when a bank fails, not a third-party fintech.

“I made the best decision with the information I had at the time,” he said. “Yet now I’ve learned a new vocabulary: fintech, neobank, third-party pass-through, BaaS. All things I had no knowledge of before.”

Often, these types of arrangements – in which a fintech company takes a deposit from a consumer and has a relationship with a banking institution as a service – operate through a “For Benefit Of” or FBO account. The fintech company should take the consumer’s deposit and open a bank account in his name.

In the event of a bank failure, the consumer would receive FDIC insurance of up to $250,000.

But sometimes the relationship between the deposit insurance company, the fintech company and the bank is not clear to the consumer. And just as often, the deal includes intermediaries like Synapse that make the flow of deposits even more complicated.

“People assume that when they deposit their money with some type of financial institution or bank-type financial company that their money is safe,” said Chris Odinet, a professor at the Texas A&M University School of Law. “Of course the reality is that there is a very different set of rules and protections between what you do with a bank and what you do with anyone else.”

All of this left Newman’s money in a regulated no-man’s land.

The FDIC, which is expert at stabilizing customer accounts when a bank fails, cannot intervene because no bank has failed. The CFPB has limited authority in cases where the bank has less than $10 billion in assets, and the Fed, which has issued a consent order against Evolve over the way it manages its fintech partnershipsit moves too slowly for consumers to try to access their money to pay for groceries or housing.

The FDIC has been trying to crack down on how banks don’t advertise deposit insurance in these types of pass-through or FBO arrangements. The agency finalized a rule late last year that outlines how FDIC insurance can be representedand issued consent orders to businesses like Sam Bankman Fried’s now-defunct FTX cryptocurrency exchange.

“Consumers do not have – nor should they have – this technical knowledge about banks and non-banks,” Odinet said. “So instead it undermines confidence in the banking system overall. And that, from a public policy perspective, is really a problem.”

But as it stands, it’s up to consumers to read the “fine print” about how fintech-bank deals work and understand the extent to which they are protected in the event of failure, said Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center.

“The way these products are marketed and the way people understand them, in consumers’ minds they associate them with a bank account,” he said. “The challenge with all this is that the further away you are, the greater the chance of failure and the funds being missing somewhere.”

In the last month, Newman said the FDIC has told her they are monitoring the situation in bankruptcy court, the CFPB has referred her to the Fed, the Fed board has forwarded her to the St. Louis Fed and the OCC acknowledged and closed its complaint. She has contacted the White House, the Senate House Banking and Financial Services Committee and other individual lawmakers, as well as FINRA and even the Better Business Bureau.

Every morning, look for news on social media and check the bankruptcy court docket. Every Thursday at 6pm he checks McWilliams’ trustee status report and on Fridays he listens to court proceedings.

“It seems like I’ve turned it into a full-time job,” he said.

You can’t get there from here

It is still possible that some of the protagonists of the Synapse failure, in particular the partner banks, face further scrutiny from regulators as consumer harm comes to light.

And while Washington’s regulatory wheels often move too slowly for people caught in the middle, Synapse’s failure could represent a watershed moment for the regulation of banking-as-a-service.

“I think this is a moment that highlights the urgency of solving the concept of banking-as-a-service,” said Adam Rust, director of financial services at the Consumer Federation of America. “An event like this may not have been expected, but now here we are, and the question is: How can we protect depositors?”

Although current trustee McWilliams and other Trump-era regulators pioneered this type of partnership during their time at the top of banking agencies, THE The last few years during the Biden administration have brought a series of enforcement actions aimed at how banks manage their relationships with third parties, including fintechs.

Banking regulators have several levers to pull, Rust said. The FDIC could issue additional guidance requiring those seeking FDIC insurance for their products to more explicitly and visibly call out the terms of such agreements, and all prudential regulators could hold banks more accountable for the actions of their fintech partners.

The Senate Banking Committee is communicating with regulators about a response to the bankruptcy, according to a person familiar with the committee’s workings, and wants to pressure investors in the fintech company and its partner banks to restore the customer access to their money.

The House Financial Services Committee did not respond to American Banker’s request for comment.

Sanchez-Adams said the CFPB could possibly use its authority under the Electronic Fund Transfer Act or over unfair, deceptive or abusive acts or practices to prosecute one or more plaintiffs in the Synapse case.

“But it’s not something that can happen overnight,” he said.

Congressional action that closes regulatory gaps that have left consumers in the lurch this time would be ideal, Odinet said. There is currently no legislation expected to be considered before the end of the year that addresses bank-fintech partnerships, but Odinet says that until such a measure is adopted, these issues will persist.

“This won’t be the last time this happens,” he said.

Source

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

9 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

9 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

9 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

9 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”