Synapses collapse exposes risks in FinTechs Banking-as-a-Service model (10/2024)
The bankruptcy of FinTech middleman Synapse Financial Technologies has exposed significant vulnerabilities in the popular Banking-as-a-service (BaaS) model, leaving thousands of customers unable to access their funds.
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As a go-between for banks and FinTech providers, Synapse maintained customer deposit ledgers and performed crucial risk management functions. Its collapse has therefore resulted in an estimated $85 million shortfall in customer funds, highlighting the lack of regulatory oversight in this sector.
Customers who deposited money through FinTech platforms like Yotta are now struggling to prove ownership of their funds, as Synapse controlled the ledger that has disappeared since its bankruptcy. Federal regulators, including the FDIC and Federal Reserve, have limited authority over FinTech intermediaries, leaving customers with little recourse.
That said, this incident is expected to accelerate changes already underway in the BaaS model, with banks moving away from outsourcing key functions to FinTech middlemen. Instead, banks are likely to favor licensing agreements with FinTechs that provide compliance software, allowing for greater oversight and risk management.
More importantly, the Synapse case underscores the need for a more comprehensive regulatory framework that addresses the unique risks posed by FinTech intermediaries. Even more so, as the financial landscape continues to evolve, striking a balance between innovation and consumer protection will be crucial.
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