Money Management Tips
FinTech Fallout: Lessons From the Synapse/Evolve Bank Dispute
Over the past several years that I’ve been covering FinTech, I’ve seen my fair share of apps shut down. Yet, I’ve never seen anything quite like the situation that’s playing out right now. As of this writing, several neobanking customers are unable to access their funds due to a dispute between Synapse and Evolve Bank.
So, what is going on between these two and how does it impact some FinTech users? What can we learn from this episode? Let’s dive into each of those questions, starting with the situation at hand.
What’s Happening Between Synapse, Evolve, and FinTechs
Synapse was a “banking-as-a-service” company that helped connect FinTech neobanks with actual banks. One of those partner banks is Evolve Bank & Trust, which happens to be one of the top FinTech partner banks in the country.
After Synapse filed for bankruptcy and a deal to sell the company fell through, Synapse reportedly shut down Evolve’s access to the Dashboard, which also meant they lost access to the ledger noting incoming and outgoing transfers. In response, Evolve says it was forced to freeze accounts associated with Synapse. As the company said in a press release, “Synapse’s abrupt shutdown of essential systems without notice and failure to provide necessary records needlessly jeopardized end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law.”
During this freeze, some customers have been unable to make debit transactions, transfer funds in or out, and more. What’s more, as of May 21st, there haven’t been any updates on when this matter might be resolved. However, some impacted neobanks have stated that they’re looking into other options and partners.
By the way, this is a very TL;DR version of events — so, for more, I’d recommend checking out FinTech Business Weekly, which has done a great job covering this story.
What apps are affected?
Some of the FinTechs that I’ve seen impacted by this ongoing issue are Copper, Yotta, and Juno. I have accounts with the latter two and have seen first-hand how the experience has been affected. With Yotta, I noticed an alert notifying me that certain account types weren’t available, while the prize-linked features were apparently intact. As for Juno, they not only had to immediately halt paying any interest on account balances but also stated that ACH transfers in or out were not working. In fact, it was through Juno’s communications that I learned about this entire incident in the first place.
Luckily for me, I only had a few dollars in each of these accounts. Unfortunately, I’ve seen plenty of reports from people who have far more money caught up in this spat — including some who received direct deposits right before this unexpected freeze. That’s why I think it’s important to look at some of the potential lessons and safeguarding suggestions to come out of this.
What Lessons Can We Learn?
What does FDIC protect?
First, I think it’s key to keep in mind what FDIC insurance actually means. While this is a topic that’s come up before, it can be a bit confusing — and, admittedly, I too get lulled into a false sense of security by it.
In short, bank deposits are FDIC insured, meaning that customers with $250,000 or less in their account will be made whole should the bank fail. However, those last few words are critical: should the bank fail. What this means is that, while a shuttering FinTech or intermediary might make it difficult for customers to retrieve their deposits, the FDIC won’t step in since it’s not the bank itself that’s under duress.
On the whole, your money should still be safe when it’s deposited in an FDIC bank. However, as we’ve seen, the process of claiming that money can be difficult if you weren’t the one dealing with them directly in the first place. In most cases, when FinTechs have closed, I’ve seen a very well-organized timelines explaining procedures for how customers could get their funds. Yet, that clearly hasn’t been the case here — which is what makes the ordeal so frightening and frustrating.
The middle man
Another unique issue in this case is the middleman. Already, we’ve seen how adding a FinTech startup in between you and a bank can impact your ability to claim your funds — but what about inserting another company between the FinTech and the partner bank? That’s exactly what’s happening in the case of Synapse.
If you look on Yotta’s site, you’ll see this: “Banking services provided by Evolve Bank & Trust.” Over on PrizePool’s site, you’ll see this disclaimer: “All Banking services are provided by Evolve Bank & Trust.” I believe most people seeing this would then assume that the relationships Yotta and PrizePool have with Evolve are identical — but they’re not. In reality, PrizePool works directly with Evolve and, in turn, has not been affected by the current issues. Meanwhile, Yotta’s relationship with Evolve apparently goes through Synapse, which is where the trouble lies.
I should note that Yotta’s disclosure goes on to mention Synapse, stating in full, “Banking services provided by Evolve Bank & Trust, Thread Bank; Members FDIC and Synapse Brokerage LLC Program Banks.” However, I personally feel as though this is where things could be made clearer. Even as someone who’s dealt with dozens of FinTech apps, I wouldn’t have made this distinction.
That’s why, going forward, I hope that FinTechs will better and more prominently explain their relationships to their partner banks. Mainly, are they directly partnered or are they working with an intermediary? Granted, there’s nothing inherently wrong with the latter — but I still think that customers should be fully briefed on what arrangement they’re entering into ahead of time. And, yes, I’m sure some of this is buried in the fine print, but that’s why I say this info should be more prominently disclosed as well.
Hedging against disaster
Finally, I think it’s time for consumers to consider the worst case scenario when looking at the benefits of FinTechs and then working to reduce their risk. While I understand that it’s in the best interest of neobanks to incentivize direct deposits from users, the idea of someone putting all the money they have in an account that then gets frozen due to no fault of their own (or even the app they signed up for!) is terrifying. Similarly, even though certain apps may have slightly higher APYs or other cool perks, putting the bulk of your money including an emergency fund into an account as a result also scares me.
Unfortunately, I don’t have a real solution here. After all, I want FinTech startups to succeed, in order to do so, they need customers to make deposits. But, at the same time, I don’t think it’s wise for consumers to fully leave their financial lives in the hands of neobanks at this time — at least not ones that don’t work directly with an FDIC-insured bank. Hopefully we’ll get to a point where I feel differently, but for now, that’s where I stand.
As a fan of FinTech overall, the past couple of weeks have been disheartening to say the least. But, at the end of the day, I am an optimist. Because of this, I do believe that some good can come of this incident (once it’s over). For example, I can foresee future FinTechs gaining favor with users by being ultra-transparent about how their partner banking programs work and ensuring that customers have all the tools they need to access their funds regardless of what happens to the company itself. I really hope I’m right about that in the long term — but, in the short term, I just pray that this Synapse/Evolve debacle will be resolved before those tied up in it suffer more financial harm.
Author
Other Articles by Kyle Burbank
Personal Finance News
Credit Card News
Bank of America Unveils Third Annual “More Rewards Day”
Next month, for one day only, Bank of America credit card customers will once again be able to earn bonus rewards. About More Rewards Day: Bank of America is bringing back its More Rewards Day for 2024. This year's celebration will take place on Thursday, November 7th. As they have for the past two years of events, customers will be able to earn bonus cashback, points, or miles on all...
FinTech News
