Fintech customers are often unaware of the risks associated with their deposits, which are not always as secure as they believe. While the bankruptcies of cryptocurrency companies make headlines, a subtle threat lurks within the traditional financial services offered by fintech firms. The recent collapse of Synapse Financial Technologies is a striking example: many fintechs were paralyzed, leaving their customers without access to their funds. In this rapidly changing context, the alliance between the strength of the traditional banking system and the innovation of fintech appears essential for navigating safely.
While the troubles of cryptocurrency companies like FTX have made significant headlines, a less visible but equally concerning danger looms: fintechs providing services similar to those of banks. When behind-the-scenes service providers, such as Synapse Financial Technologies, go bankrupt, it can trigger a shockwave through several fintech companies like Copper, Mainvest, and Yotta. Customers, who often believe their deposits are secure, find themselves exposed and unable to access their funds sometimes for months. This risk is even more acute because, in many cases, users do not perceive the dangers they face when using the services of these firms, which do not benefit from the protection of the FDIC enjoyed by traditional banks. However, fintechs must partner with “bank partners” to ensure the safety of deposits, but the decrease in banking partners complicates matters further. The lack of strict regulation, unlike banks, poses a significant problem, despite the innovation brought by these companies.
Hidden Risks of Fintechs for Bank Deposits
Financial technology companies, often referred to as fintech, appear transparent and modern. However, the tragedy of many cryptocurrencies and companies like FTX and BlockFi, highlighting instability, fuels distrust. Consumers often overlook potential dangers when placing their funds in a fintech. Recent events show that these companies are not without risks: in April 2024, the provider Synapse Financial Technologies, collaborating with several fintechs, went bankrupt. This failure caught their customers off guard, unable to access their savings.
The Danger of Public Unawareness
What is paradoxical is that these companies, despite their secure appearance, often rely on a complex chain of third-party intermediaries. For the average consumer, this can shift from simple ignorance to tangible loss. A striking example is when customers of neobanks thought their deposits were insured. However, during the bankruptcy hearings of Synapse, they discovered that this was merely an illusion, caused by a lack of precise information and a misunderstanding of the risks incurred. The absence of coverage by the Federal Deposit Insurance Corporation (FDIC) for fintechs intensifies the danger.
Reflections on the Future of Fintechs and Traditional Banks
The collaboration between traditional banks and fintechs seems to be a viable path. By partnering, banks bring robust regulation and proven security to fintechs. But transitioning from a service provider relationship to a true partnership imposes new standards: security, compliance, and prudent management. This synergy is mutually beneficial, but it also requires banks to be willing to engage more in the operations of fintechs. To delve deeper into this topic, I invite you to explore a comprehensive paper here.
