Are We Witnessing the End of the Neobank?
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Are We Witnessing the End of the Neobank?

The first time I heard the term “FinTech” was in 2015. In the near-decade since, I’ve become a diligent observer of the industry and a sizable fan overall. Over the years, I’ve witnessed some startups rise to mainstream success while others go out nearly as quickly as they arrived. Similarly, I’ve watched as venture capital funding reached record highs… and then receded. Yet, even through the “crypto winter” and other challenges, things haven’t seemed as bad for FinTech as they have in recent weeks. In fact, I can’t help but wonder whether we could very well be watching the downfall of “neobanking” altogether.

Why the Neobanking Model is Broken

Recapping the Synapse collapse

In May, customers with accounts on Yotta, Juno, and Copper suddenly lost access to their funds. Not only were debit card transactions being declined but withdrawal requests resulted in errors.

As it turns out, the reason for this didn’t really have much to do with the apps themselves but two of the companies these neobanks partnered with. Specifically, Evolve and the bankrupt middle-man Synapse. According to Evolve — which is an FDIC insured bank — Synapse shut off the bank’s access to the dashboard, which provided ledger information. In response, Evolve disallowed transfers to these accounts.

Since then, Synapse and Evolve have been in court, but no resolution has been reached. In the meantime, customers have vented their frustrations on Reddit, filed complaints with various agencies, and even alerted members of the media in a bid to bring attention to the matter. Unfortunately as of this writing, none of those efforts have been successful.

At the heart of the matter are two key issues: 1) a misunderstanding of FDIC insurance and 2) the fact that many customers didn’t even realize Synapse had a role in their account management. Starting with the former, as many are now learning, FDIC insurance is only valid in the event of a bank failure. Alas, in this situation, Evolve hasn’t failed — Synapse did. Thus, there is no mechanism in place that ensures depositors get access to their money.

As for the second point, although terms of service do mention Synapse, the nature of the arrangement may not have been clear to customers. Instead, it was Evolve (and its FDIC insurance) that was put front and center. Of course, even if customers were aware Synapse was involved, it’s unreasonable to believe that this should have served as any sort of warning to users that something like this was possible.

For what it’s worth, other FinTechs that partner directly with Evolve (as opposed to Evolve via Synapse) have been unaffected. However, in addition to the situation with Synapse, Evolve revealed this week that it had fallen victim to a data breach. In other words, things have not been great for any Evolve customers, even those who can still access their money.

Who can tell the difference?

The last time I mentioned this Synapse/Evolve saga, I noted that the issue seemed to boil down to the middle man (in this case Synapse). That may or may not be true — but, assuming that it is, how are everyday consumers even supposed to tell the difference between platforms that work directly with banks and those that don’t? To be honest, I suspect that they won’t. In turn, unfortunately, I expect that some will throw the proverbial baby out with the bathwater and swear off all neobanks going forward.

Losing the advantage

Even before these current struggles, several neobanking offerings were beginning to lose their luster. Why? Well, with interest rates reaching multi-year highs, finding a banking account that paid a decent APY suddenly became much simpler. Plus, in many cases, rates of 4% APY or higher could be obtained without jumping through any of the hoops that some neobanks demanded (such as requiring direct deposit or insisting that customers make a certain number of debit card purchases per month).

In my opinion, this was likely a big blow to these apps. Speaking from my own personal experience, I quickly lost interest in the gimmicks of Yotta once I could get a strong APY from online banks like Ally or Discover. What’s more, some neobanks even weakened their value proposition during this time. Namely, Current — which offered 4% APY on up to $6,000 in funds at a time when the going rate was less than 1% — instituted a direct deposit requirement while lowering its standard rate to just 0.25% APY even as rates were surging elsewhere.

Moving behind the scenes

Another trend that I’ve observed in recent years has found FinTechs moving behind the scenes. Rather than operating a consumer-facing neobank, some startups have taken those elements that made their particular services special and offered them to other platforms instead.

A prime example of this is Spiral. This neobank made it easy for customers to set aside money to automatically donate to charity. Although their consumer app shut down a couple of years ago, the company still exists and has now partnered with other banking tools to give their customers versions of these tools.

In a way, in some cases, these consumer-facing apps may even serve as a proof of concept. After all, selling your tech to other businesses can be more lucrative than relying on consumer debit card interchange fees and the like. Given this reality, I suspect that this event will lead even more neobanks (or would-be neobanks) to reconsider and perhaps pivot before they even go to market.

What’s next?

Personally, I don’t really see how Yotta or Juno can really survive this current incident — at least not in a consumer-facing form. Maybe I’m wrong, but I can’t imagine that users will want to keep their funds in the custody of these neobanks a minute longer than they have to once transfers are once again enabled. I suppose it’s possible that these apps will actually be best equipped to plug some of the holes that led to these issues and ensure that they don’t happen again, but I also don’t foresee many customers seeing it that way.

As for other neobanks, although I don’t anticipate a mass extinction event immediately, I do expect to see a wave of closures. Furthermore, in contrast to recent years that have seen a slew of niche neobank offerings rolling out, I think we’ll see the pace of new offerings slowing significantly. That said, if there are any startups that could break through, it could be those who put an emphasis on security and convince customers that they can trust them. Perhaps this could include features such as advanced tracking of funds, having a dedicated customer service line, etc.

Lastly, I would be shocked if greater FinTech scrutiny isn’t coming. While some startups have resisted regulatory pressure in the past, at this point, it may be more welcomed — especially if it can help these companies reassure customers. Basically, I see it as a “be regulated or die” situation emerging in the months ahead.

Looking at the current FinTech landscape, there are still plenty of tools and services that I like and think are worthwhile. This even includes some neobanks — although that list is dwindling. Yet, even I have to admit that the neobanking model no longer seems sustainable, especially following the fallout from Synapse/Evolve.

For the time being, while I do intend to continue to review these offerings, I’ll be doing so with greater skepticism and with the knowledge that there may be more risk involved than meets the eye. As for those looking for a reliable place to put their money, I think looking to a fully licensed online bank, such as Discover, Ally or FinTech-turned-banks SoFi and Varo, makes the most sense. Ultimately, I hope this current mess can be fixed as soon as possible and steps are taken to help ensure nothing of this nature happens again.


Kyle Burbank

Head Writer ~ Fioney
Kyle is the head writer for Fioney. He is a personal finance nerd, constantly looking for new apps and services to test and incorporate into his own financial game plan. In addition to his role at Fioney, he's written for other publications including Born2Invest, Lifehack, and Laughing Place, as well as his own site Money@30. He also creates personal finance and travel-related videos for Fioney's YouTube channel, which has garnered more than 2 million views. Currently, Kyle resides in Springfield, Missouri with his wife of 10 years. Together, they enjoy traveling (including visiting Disney Parks around the world), dining, and playing with their dog Rigby.

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