Is depositing money in an advertised FDIC-insured, high-yield savings account a risky move? For thousands of digital banking customers, it’s proven riskier than burying money in an unmarked ditch. The promise of seamless digital banking took a sharp turn in April 2024 with the bankruptcy of Synapse Financial Technologies Inc., a critical intermediary linking fintech companies to traditional banks, resulting in $265 million in frozen end-user funds. Fintech, or financial technology, is a catch-all term for “new technology that seeks to improve and automate the delivery and use of financial services.”Synapse, a banking-as-a-service (BaaS) platform, partnered with many FDIC-insured banks and roughly 100 fintech companies, such as Yotta, Juno, Dave and Relay. These fintechs function as neobanks, which are online banks with no physical locations that, with lower overhead costs, can offer competitive rates on loans, low fees and high interest rates on deposit accounts. Synapse connected these neobanks with traditional, brick-and-mortar, FDIC-insured banks to actually store customer funds.But first, what does it really mean for a bank to be FDIC-insured? According to the Federal Deposit Insurance Corporation (FDIC), account-holder funds in FDIC-insured banks are protected “in the event of a bank failure … [and] automatically insured to at least $250,000 at each FDIC-insured bank.” And, the FDIC defines a bank failure as “the closing of a bank by a federal or state banking regulatory agency … when it is unable to meet its obligations to depositors and others.” Between 64% to 75% of the frozen funds have been made accessible to the respective customers. However, in the months since Synapse’s collapse, Jelena McWilliams, the court-assigned trustee, has identified a $65 to $95 million shortfall between Synapse, bank, and fintech ledgers, impacting hundreds of thousands of fintech customers, including this article’s author.Impacted customers have received pennies on the dollar, leaving them without their life savings, without their checking accounts for groceries and rent, and with a shattered faith in the United States banking system.“The hundred-million-dollar question is where did the money go? And is it money that Evolve [Bank & Trust] should be accountable for or one of the other banks or somebody else?” said Judge Martin Barash in the most recent hearing of Synapse’s Chapter 11 bankruptcy case on Jan. 8, 2025.Fintechs impacted by Synapse’s demise, like Yotta and Juno, had assured customers that their funds were FDIC-insured. In January 2021, the headline on Yotta’s homepage – a service offering high-yield savings and checking accounts with a gamified experience – read: “Win up to $10 million by saving in an FDIC insured account.”But, is that accurate? Yes and no. These fintechs partner with banks that are FDIC-insured to store end-users’ money. However, the fintechs themselves are not FDIC-insured and n
Ven. Feb 7th, 2025
