Fintech
The financial technology crisis leaves millions of Americans unable to access their money
- Synapse Financial Technologies, a banking services provider, has filed for bankruptcy, preventing neobanks that use their services from accessing customer funds.
- Popular banking apps such as Yotta, Juno and Copper are affected, with some shutting down.
- Over a million Americans could be affected and unable to access their money.
Neobanks like it Yotta, JunoAND Copper had grown in popularity in recent years. These banking apps were not actual banks, but rather banking services that used technology to connect their apps to real bank accounts at partner banks.
Synapse Financial Technologies was one of the largest providers of these “banking as a service” solutions and found itself in bankruptcy and closure. For banking and partner services banksThis created major disruptions that left potentially millions of Americans without access to their funds for nearly two weeks.
Difficulties for consumers
Reddit discussions and court documents revealed the gravity of the situation. Individuals say they cannot access their funds, pay their bills and are worried about how they will pay rent next month. Additionally, direct deposits from payroll providers can actually deposit funds into these inaccessible accounts, causing even more money to be tied up.
One of the largest banking providers, Evolve Bank and Trust, said it needed Synapse records to reconcile customer accounts opened at its bank. Customers fear that balances may be incorrect once the problem is resolved.
Furthermore, the FDICthe Federal Reserve, the President and Congress have all remained silent on the crisis.
Scope of the problem
Synapse has been a major player in the “banking as a service” space, which allows fintech startups to offer banking services by partnering with FDIC-backed banks. According to an April statement from Synapse founder and CEO Sankaet Pathak, the company had contracts with 20 banks and 100 fintech companies, serving about 10 million end users.
These partnerships have allowed FinTech companies and neobanks to advertise themselves as “FDIC insured,” giving customers a sense of security for their funds should something happen. Generally, when traditional banks fail, customers can resume their normal banking activity within a few days. In this case, customers were effectively locked out of their accounts for weeks.
Furthermore, there are fears that this could cause a bank run for some of these partner banks. When banking access is restored, millions of consumers will immediately withdraw their funds from these banks. The effectiveness of this large-scale withdrawal is unknown.
Many of the affected companies have already announced that they will cease operations. Copper, with almost 1 million users, announced on May 13th they will simply close and work to ensure the return of customer funds. However, customers are still waiting.
MainVestan investment company, announced which will cease operations on June 14, 2024 due to the Synapse and Evolve situation.
Next steps
Customers are waiting for regulatory agencies to act. The FDIC and Federal Reserve have so far failed to take action, which has caused significant problems for consumers.
The bankruptcy court where the Synapse hearings are taking place is trying to resolve the matter, but that doesn’t help consumers who can’t access their money today.
Consumers should use caution when using banking as a service financial apps: the protections that come with using these apps are not the same as traditional banks. And regulators need to take a more effective approach to dealing with this type of situation.
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