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Important points
- Synapse Financial Technologies, a banking-as-a-service provider, has filed for bankruptcy, leaving neobanks that use its services without access to their customers' funds.
- Popular banking apps such as Yotta, Juno and Copper are affected, and some are being discontinued.
- Over a million Americans could be affected and unable to access their money.
Neobanks such as Yotta, Juno and Copper have grown in popularity in recent years. These banking apps were not real 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 was now forced to file for bankruptcy and cease operations. This has caused severe disruptions to banking services and partner banks, potentially leaving millions of Americans unable to access their funds for almost two weeks.
Distress for consumers
Reddit threads and court documents have revealed the severity of the situation. Individuals claim they have no access to their money, can't pay bills, and are worried about how they'll pay their rent next month. In addition, direct deposits from payroll providers can actually deposit funds into these inaccessible accounts, resulting in even more funds being locked.
One of the largest banking service providers, Evolve Bank and Trust, has stated that it needs Synapse's accounts to reconcile customer accounts opened at its bank. Customers fear that the balances may be incorrect once clarified.
Furthermore, neither the FDIC, the Federal Reserve, nor the President and Congress are silent about the crisis.
Scope of the problem
Synapse was one of the biggest players 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 filing by Synapse founder and CEO Sankaet Pathak, the company had contracts with 20 banks and 100 fintech companies and served about 10 million end users.
These partnerships allowed FinTech companies and neobanks to present themselves as “FDIC insured” and make customers feel that their funds are safe should something happen. When traditional banks go bankrupt, customers can generally resume normal banking operations within a few days. In this case, customers were effectively locked out of their accounts for weeks.
Additionally, there are concerns that this could lead to a run on some of these partner banks. When banking access is restored, millions of consumers will immediately withdraw their money from these banks. The effectiveness of this large-scale withdrawal is unknown.
Several of the affected companies have already announced that they will cease operations. Copper, which has nearly 1 million users, announced on May 13 that it will simply shut down and work to get customer funds returned. However, customers are still waiting.
MainVest, an investment firm, announced that it will cease operations on June 14, 2024 due to the Synapse and Evolve situation.
Next Steps
Customers are waiting for action from regulators. The FDIC and Federal Reserve have so far failed to intervene, causing significant problems for consumers.
The bankruptcy court where the Synapse hearings are taking place is trying to resolve the issue, but that won't help consumers who can't access their money today.
Consumers need to be careful when using banking-as-a-service financial apps – the protections when using these apps are not the same as traditional banks. And regulators need to find a more effective approach to deal with such situations.
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Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
