Fintech

The collapse of the fintech supported by Andreessen shows the risks of banking intermediaries

Published

10 months ago

12 June, 2024

Joseph Dominguez and his wife deposited more than $20,000 at Yotta, a financial technology startup that gamifies savings. Now they can’t touch it following the collapse of a separate fintech intermediary, Synapse Financial Technologies Inc., in a case that highlights how a popular online banking model can fall through regulatory cracks.

Synapse, which filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Central District of California in April, operated in a market called “banking as a service.” The company acted as an intermediary between banks and their third-party fintech providers, maintaining a record of customer deposits and carrying out vital risk management tasks.

Supported from Andreessen Horowitz and other major Silicon Valley venture capital funds, Synapse has partnered with about 100 fintechs serving a total of 10 million end customers, the company said in a bankruptcy filing.

Synapse’s collapse is an example of holes in the fintech regulatory framework, bankers and consumers say.

Dominguez said he and his wife have account and routing numbers at Evolve Bank & Trust, a Memphis-based lender that was one of Synapse’s four partner banks. But they have no way to prove that the money deposited at Yotta — funds that passed through Synapse and ended up in Evolve’s accounts — were theirs because Synapse controlled the ledger, which disappeared after the company’s bankruptcy.

The BaaS business model “was a hard lesson learned: I have to have a more one-on-one relationship with a financial institution,” Dominguez, a 28-year-old from Sacramento, California, he wrote in an email to the bankruptcy court last month.

According to a June 7 report, there is an estimated $85 million shortfall in customer funds managed by Synapse and its fintech partners. status report by Jelena McWilliams, former president of the Federal Deposit Insurance Corp. named Chapter 11 trustee in Synapse case.

The FDIC and Federal Reserve told the bankruptcy court they can’t do much to help customers get their money because regulators’ authority is limited to banks.

Synapse’s meltdown is also likely to accelerate changes already underway in the banking-as-a-service model, as lenders move away from outsourcing key functions to fintech intermediaries.

“Banks cannot outsource their responsibilities. Fintechs can’t step in to take on the responsibilities that have been there all along,” said Charles Potts, chief innovation officer at the Independent Community Bankers of America, a trade group for community banks.

Synapse’s bankruptcy lawyer at Levene Neale Bender Yoo & Golubchik LLP did not respond to a request for comment.

New model

Banks have a long history of partnering with technology companies to serve a broader customer base and expand their reach.

This has included purchasing compliance technologies and other tools from major service providers such as Fiserv Inc., Fidelity National Information Services Inc. and Jack Henry & Associates Inc.

Today, some intermediary companies like Unit offer tools specifically tailored to the needs of community banks and their fintech partners. These companies operate largely by licensing software, or software as a service, to banks that maintain direct relationships with fintechs.

“The reason this industry exists is that the framework of partner banks with technology companies has existed for a long, long time,” said Itai Damti, Unit co-founder and the company’s CEO.

Synapse and other companies in banking as a service are different.

Instead of licensing the software, BaaS intermediaries enter into contracts with both the bank and the fintech partner. The BaaS company manages customer onboarding, conducts fact-finding and anti-money laundering checks, and maintains a register of customer accounts, among other risk management and compliance functions.

Synapse has created “for the benefit of” accounts at Evolve and other banks, allowing lenders to deposit fintech customers’ money into pooled accounts.

Banks were supposed to monitor Synapse for compliance with banking regulations, but the company itself was largely exempt from regulatory scrutiny.

In Synapse’s case, the Fed told the bankruptcy court it is being sidelined as customers seek to unlock their money because it only regulates banks, not fintechs. The FDIC’s role is even more limited because it does not oversee Evolve — which is the responsibility of the Fed and state regulators — and the agency’s deposit insurance fund is available only when banks fail, not their fintech partners.

Evolve is not at risk of going bankrupt, despite blocked Synapse accounts, regulators say.

“Watershed moment”

Federal banking regulators, including Fed Vice Chair for Supervision Michael Barr, have warned banks to closely manage their relationships with fintech partners.

This month the FDIC issued a consumer advisory warning Americans about the risks inherent in banking with a non-bank fintech.

The Fed and FDIC have also entered into at least 16 consent orders since last year with banks for failing to adequately manage fintech partnerships with third parties and “middleware” relationships, including a action targeting Lineage Bank, one of Synapse’s partners.

“There was already a shadow in the sense of the stack of consent orders,” said Jason Mikula, a consultant and author of the Fintech Business Weekly newsletter who is closely following the Synapse case.

Consumer advocates argue that initial enforcement measures have not been sufficient.

Synapse’s failure was the “watershed moment” that made it clear that the BaaS model must change, said Adam Rust, director of financial services at the Consumer Federation of America. “You cannot have entities operating in the banking sector that are completely outside the banking regulatory perimeter,” he said.

Even before the Synapse calamity, banks were moving away from BaaS and striking more licensing deals with fintechs that provided compliance and other software, he said

Peter Dugas, executive director of the Capco consulting firm and former Treasury Department official in the George W. Bush administration.

Regulators will expect banks to have much greater oversight of the fintechs they partner with, he said.

“Financial institutions have a fundamental responsibility to mitigate third-party risk,” he said.

Higher costs

Industry advocates say banks taking more risk functions in-house means higher costs and potentially less innovation.

“The cost to implement a new direct-to-consumer or direct-to-business solution is higher. It’s inherently more expensive,” said Potts, of ICBA.

Some community banks are abandoning fintech partners as banks deploy their own licensing tools or software, despite high internal costs, he said.

“What you’ve seen happen over the last 12 to 24 months is a lot of these good banks spinning off, dissolving, shedding some of those fintech relationships,” Potts said.

Banks reject more than 90% of requests for fintech partnerships, said Michele Alt, a Klaros partner who worked at the Office of the Comptroller of the Currency.

“Often the fintech is simply too small to work for the partner bank,” he said. “Or the fintech does not have a level of risk management and compliance risk that meets the partner bank’s requirements.”

Eliminating fintechs that can’t perform BaaS functions could ultimately protect consumers, Rust said.

“Maybe it should be expensive to run a bank,” he said.

“I don’t feel my best”

Even as banks and fintechs are adapting to Synapse’s failure, the bankruptcy court is struggling to figure out how to give people their stranded money back.

And those people are suffering.

For customer Yotta Harley Johnson, 22, of Myrtle Beach, S.C., frozen funds mean there isn’t enough money to buy food, pay rent or keep up with bounced checks and late fees that accumulate.

Johnson’s plans to buy a car are also on hold, customer Yotta said in a e-mail to the bankruptcy court.

“I’m not feeling the best about life and this financial situation right now,” Johnson said.

Source

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

Source

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.”