When FDIC insurance doesn’t work

In late April, Synapse, a financial technology (fintech) intermediary that helps companies embed banking services into their offerings, declared bankruptcy following several major partners terminating contracts over disputes about how much in customer balances Synapse owed.

The bankruptcy is high-profile because there is a $85 million shortfall between what Synapse’s partner banks are holding and what depositors are owed.

One of the hard lessons from this failure is around deposit insurance and the risks of fintech-banking partnerships.

The FDIC provides deposit insurance of at least $250,000 to protect your money in the event of a bank failure. In the Synapse case, the FDIC can’t make customers whole because there hasn’t been a bank failure. Synapse, the middleman failed, not its partner banks.

Subsequently, the FDIC released a newsletter about “third-party apps,” highlighting the risks of using nonbank intermediaries. The issue is that it’s impossible for a consumer (or business) to verify if an intermediary meets the requirements for pass-through deposit insurance to apply:

• Users can’t check how an intermediary’s accounts are titled at FDIC-insured partner banks

• Users can’t inspect the books of an intermediary or partner bank to ensure their accuracy

The Synapse bankruptcy could derail the prospects of other fintech companies in the space for years to come.

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