Synapse's failure is nobody's responsibility and everybody's problem

Bloomberg News

It wasn't long after I started dating the woman who would become my wife that I decided she was the one for me. She was (and is) beautiful and interesting and much smarter than me, and I decided that if things didn't work it wasn't going to be because I didn't know how I felt about her or what I wanted our future to be. 

So I started saving for an engagement ring, but to do that I first had to crawl out from some modest credit card debt, moving the goalposts a little bit farther. More importantly I had to develop a habit of saving my money, which I did very incrementally over the course of about four years. When I finally proposed, I was of course thrilled that she said yes. But I was also proud of myself for setting a financial goal and achieving it — it made me feel like I had proven something to myself as we continued our journey together. 

When I read Claire Williams' story about fintech customers unable to access their savings because of the bankruptcy of fintech middleware firm Synapse, I was transported back to that time when I was struggling to save just a little bit here and there and how precious that nest egg — and what it represented — was to me. And so it wasn't hard to feel the frustration that those customers must feel about having done something difficult only to be let down by some bureaucratic snafu that no one seems able to explain or solve.

American Banker readers know perhaps better than most what deposit insurance is and how it works, so indulge me while I recap: Deposits at a bank — located in either checking or savings accounts — are federally insured up to $250,000 per account. That policy came about during the Great Depression, but was nonetheless hard-won — the government decided that people shouldn't have to worry about whether or not their banks were solvent, because they had discovered recently that fears about a bank's solvency was a proximate cause for actual bank insolvency. 

Fintechs, meanwhile, are not banks and do not take deposits and thus are not insured. But they often do serve as a customer-facing business that can help people reach their financial goals by helping them boost their credit, manage their money and get into the habit of saving. But the back-end deposit-taking capacities are handled by banks, which offer that service for a fee — what has come to be known as banking as a service, or BaaS. Regulators have gotten more pointed in their critiques of bank-fintech partnerships of late, including issuing a cease and desist order against Evolve Bank — one of Synapse's partner banks — requiring them to improve their third-party risk controls and prohibiting the bank from entering into new fintech partnerships without regulatory approval.

That may seem like too little, too late — and for customers whose money is in limbo, it probably is. But it's also a reflection of the limited actions that banking regulators can take against nonbanks, at least in the short term. One might unfavorably compare the extraordinary actions that regulators took after last year's bank failures with the tepid response to Synapse's collapse, but regulators simply don't have the same tools to intervene in the latter case — and even if they did, would likely not want to set a precedent whereby failed fintechs get bailouts or special treatment. So for fintech customers caught in the Synapse collapse, the ball is unfortunately in the bankruptcy court, meaning resolution is likely to be maddeningly slow.

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But there are things that regulators can still do to close the gaps that led to this fiasco on the one hand and let those customers know that regulators feel their pain on the other.

To the former point, regulators have been doing small things to address this problem for some time. Aside from the aforementioned enforcement actions taken against banks for supervisory shortcomings in their fintech partnerships, the Federal Deposit Insurance Corp. has been increasingly diligent about enforcing its rules on representation of deposit insurance and signaling the rules of the road for such representation by fintechs in recent years. The Consumer Financial Protection Bureau — which has a wider remit than other banking regulators — may also have a role to play if fintechs' deposit insurance representations amount to an unfair, deceptive and abusive practice. 

But to the latter point, what has been missing — at least so far — is some kind of an acknowledgement from people in power that Synapse's bankruptcy exposes a shortcoming and they're on the case. Ordinary people — as opposed to the extraordinary readers of American Banker — decided in many cases to do business with fintechs with the understanding that their money would be as safe with them as it would be with a bank, and that has proven not to be necessarily true. 

People trust the financial system more than they understand it, and that is by design — the whole reason we have deposit insurance in the first place is so that people could go about their lives assuming that their money won't just disappear. Synapse's bankruptcy breaks that trust, and that's a problem that needs to get sorted out quickly — particularly for those already on the periphery of the financial system and to whom fintechs often market themselves.

Whatever comes next from a rulemaking or enforcement standpoint — or a legislative one, for that matter — will take time. But there are thousands of people out there right now whose money effectively disappeared and who feel like no one sees them or cares. That is an experience that could shape the future of their financial and banking relationships for the worse — unless they get the message that help is on the way.