Understanding User Risks: Learnings from a Fintech Platform Shutdown
The rapid evolution of financial technology (fintech) transformed how consumers & businesses interface with financial services.
From streamlined payment options to modernized banking platforms, fintech apps offer the latest in user experience.
Unfortunately, the fallout of Synapse Financial Technologies (between late 2023 into Q2 2024) highlights a cautionary sign that users face risks with their funds, transacting, and personal data in signing up for these digital offerings.
In this article, we (i) recap what took place with Synapse, (ii) top risk that from fintech apps, and (iii) best practices in choosing high-quality platforms with sustainable programs.
The Synapse Saga: A FinTech Breaking Point
The US-based banking-as-a-service firm, Synapse Financial Technologies, filed for bankruptcy in April 2024 — having more than 9 years in operations and numerous fintech partner programs live.
The company’s technical infrastructure allowed for non-banking companies (many who started as small startups) to deliver financial products without needing regulatory licenses. Deposit accounts, spend cards, credit builder products, payment processing, and even crypto wallets were available. Synapse was the intermediary between startups & sponsor banks, supporting faster compliance and bank reviews.
Signs of trouble became apparent at the end of September 2023, when partner banks reported discrepancies in reconciliation of customer funds in For-Benefit-Of (FBO) accounts held by Synapse. Banks decided to withhold revenue from Synapse until the gaps were addressed. .
The company (who hadn’t fundraised since 2019) was unable to continue its full scope of operations and cut back on staffing at the start of October 2023.
Many fintechs were caught in the crossfire — payment settlement delays, lack of response on platform issues, no direct client communication.
Customer complaints quickly increased as Synapse was unable to commit to previous levels of support. The company was unable to continue operating (due to lack of liquidity) and bank partners froze all user funds.
Customers could no longer access balances in deposit accounts. When they would be able to regain access, and who they reach out to for help — were unknown.
The settlement of funds is ongoing and has escalated to regulators, who have been tasked with sorting customer & bank records in order to produce a final book of record and disburse funds accordingly.
In the aftermath, fintech-bank partnerships have greatly declined as less banks are willing to be sponsors. Increased emphasis on stronger oversight & frameworks from banks is being called out — no longer able to delegated to 3rd parties. The industry needs to find solutions to reduce exposure to lack of fund security and transparency.
Key Risks Associated with Fintech Apps
Despite the mess with Synapse and its partner banks, fintech app usage shows no signs of slowing down in the next decade.
The addition of artificial intelligence, blockchain, and potential approval of stablecoins in banking will lead to further innovation in financial services.
With more fintech adoption on the way, the potential risks for users multiplies — custody of funds, proper oversight with operations, and data security remain open concerns in the industry.
Consumers & businesses should ensure they make informed choices when it comes to choosing fintech platforms that manage their financial lives.
Critical vulnerabilities that all end-users should be wary of before signing up to a new program:
Custodial Risk: comes from a financial institution or fintech platform deciding to shut down while holding customer funds, resulting in delayed (or no) access — e.g. frozen accounts due to bankruptcy of a fintech, or a regulator taking over a bank;
Commingling of Funds: mixing customer funds with other fintech customers OR a company's operational funds, which increases the likelihood of discrepancies & accounting errors — complicating research & recovery efforts if there are disputes;
Regulatory Oversight Limitations: without specific guidance for fintech partnerships with banks, there’s ambiguity in responsibilities and processes between fintech & bank partners; lack of oversight leads to added risk in user onboarding, transacting, and fraud/losses;
Data Security and Privacy Concerns: similar to banks, fintechs are also at-risk when it comes to unauthorized access, data breaches, or misuse of sensitive (personal) information;
Operational Transparency: understanding how healthy a fintech company is in terms of their finances, risk management, and customer relationships;
What happens when a fintech platform is new?
Do some light research on the company, its founders, customer reviews of its app, and who the platform competes with. If your concern is protecting funds, limit how much of a balance is kept in a wallet/account — at least in the first months.
While fintech innovation continues to enhance financial services, ensuring there’s trust between a user and the fintech/bank they work with remains a constant.
Best Practices for Fintech App Users
Besides awareness of the risks in utilizing fintech apps, consumers & businesses can choose to go further to reduce exposure to financial, security, and data risks.
Understand Fund Custody Arrangements
Verify if customer funds are held in separate accounts (to avoid co-mingling) and insurance coverage from the Federal Deposit Insurance Corporation (FDIC).
Monitor Regulatory Compliance
Keep up-to-date about the fintech company's regulatory status, compliance certifications it has, and complaint history.
Prioritize Data Security
Fintech apps should showcase strong encryption, two-factor authentication (2FA), and transparent data privacy policies during initial user onboarding.
Maintain Diversified Financial Relationships
As mentioned in the previous section, keep balances to a minimum (if possible) to avoid concentrating the bulk of your funds in one location; spreading funds & assets in multiple banks & fintechs is a diversified approach that can mitigate risks.
It’s important to be aware of vigilant when it comes to fintech platforms. There’s a tendency to ‘set & forget’ but this approach can jeopardize personal funds & data in working with a poorly supervised apps.
Caution with Future FinTech Usage
The fintech landscape offers exciting opportunities for enhanced financial management and accessibility.
In learning from Synapse’s fallout, it's crucial for consumers to stay ‘in-the-know’. Users should know be more aware of potential risks and how to reduce their exposure — thereby proactively protecting their assets and data.
As innovation & program options continue to increase,so does the type of financial products and levels of convenience and access. Not all fintech (and banking programs) are created the same and may not operate under the same set of guidelines (i.e. bank-licensed direct programs versus bank sponsorships).
It’s up to consumers & businesses to acknowledge the risks and make decisions as to the providers that store funds and manage financial activity on their behalf. In understanding how funds are held, regulatory safeguards, and security measures, users are better able to protect themselves from fintech platform failures.
Lastly, the wind-down of the Synapse collapse should come with guidance and new frameworks that help banks, fintech, and users avoid similar issues with business continuity and funds access.
