I don't know why this isnt bigger news, and I dont get why there aren't clear answers.
Since synapse isn’t a bank, technically there hasn’t been a bank failure so fdic doesn’t step in.
There’s over 128BB in the fdic fund so we can easily bail these customers out. But they should figure out if it’s fraud or what not.
What really frustrates me is that many financial products state that pass through FDIC insurance may apply, sometimes listing various pretty arbitrary-sounding requirements for that.
As I see it, either a fintech makes sure these preconditions apply for all customers, or they shouldn’t get to mention FDIC insurance at all.
If FDIC is going to step in, it's clear regulation needs to be created that saying "We are FDIC Insured" is only allowed if your money directly transfers to bank account in your name.
How the hell do you get a checking account and a debit card from "not a bank"?
That's $128 Billion.
FDIC can't get involved because they can't even tell who rightfully has what money where. Lol
Wouldn’t FDIC insurance only cover $250K in each bank account if the bank went under? In this case it’s the service people used to put money (or the service the service used) into those accounts that’s gone bust with poor or no record of where people’s money has gone.
> Or is synapse "shadow banking" gone wrong?
Yes! Remembering where and how much customer money has gone is regulated banking 101
Mercury is the provider I know who does this (in partnership with Evolve, as the link indicates) but I think there are others as well.
The limit isn't per account; from the FDIC website:
> The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
A properly notated pooled account should confer FDIC insurance to the underlying depositors. But if the intermediary doesn't properly notate the underlying accounts at the bank, or doesn't send all of your money to the underlying bank, FDIC insurance doesn't cover that. And you won't have statements from the insured bank to verify that the money is there either.
There's a FDIC document specifically about these kinds of pooled accounts: https://www.fdic.gov/deposit/diguidebankers/documents/fiduci...
1. Sure, you can call what the FDIC did with respect to SVB an exception, but it wasn't without precedent, and there was a defined process for dealing with situations that could lead to "systemic disruption". That's very different from some sort of bailout for Synapse, where the FDIC never had a relationship with them in the first place. Furthermore, while it's fine to argue about moral hazard with the SVB bailout, no taxpayer funds were used here, and my understanding is that nearly all (if not all) of the money to make depositors whole came from a forced sale of SVB assets. Any balance came from FDIC insurance premiums from other banks.
2. "But I don’t think Synapse customers were SV startups owned by VCs" - that part is just wrong. Lots of Synapse's customers, i.e. the companies who purchased access to Synapse's APIs, most definitely were startups with big VC investors.
1. You have the underlying FDIC ensured partner banks. However, to be clear, FDIC insurance only covers if the bank fails. Synapse itself isn't covered by FDIC insurance.
2. Synapse operates as a middleman, where they provide "ledgering tech" (more on that below) and APIs that connect to the underlying partner bank. For example, say you're a startup that offers business services to sole proprietors and small businesses, and you want to be able to let your customers open a bank account. You connect with Synapse and a partner bank, so that you can use Synapse APIs from your website to open accounts for your customers.
3. The important point, though, is at the partner bank there is usually a single "FBO" (for benefit of) account on the bank's core banking system. So when end customer opens a new account, a new account isn't actually created in the partner bank's core banking system. Instead, Synapse keeps track of all the individual customers funds separately in their own ledger that they keep.
It appears here that there is a big discrepancy between what Synapse's ledgers say they owe end customers, and what is actually stored with the partner banks. And that's the part where I think regulation is coming. There are almost no checks right now to ensure that the ledgers of these "bank API middlemen" (and there are a bunch of them) actually reconcile with the underlying funds kept at these partner banks. And many of these fintechs tout "FDIC insurance", but again that only protects you if an underlying bank goes out of business, not if the uninsured middleman is doing bad math.
And, to be honest, I think regulation would be a great thing here. A lot of these "banking-as-a-service" middle men did provide a lot of tech value (e.g. easy to access APIs - think similary to what Stripe provided for card payments but for banking), but apparently played fast and loose with actually keeping track of customer funds correctly.
I'm really curious.
Real banks won't do business with unregulated/unlicensed entities. That is why "fintech" is all built on top of random banks you've never heard of.
There are plenty of wealth management companies, family office management platforms, etc. that have proper licensing that get extensive access to advanced banking APIs at the "household name" banks.
Reminds me of the Mitchell and Webb skit about identity theft: https://m.youtube.com/watch?v=CS9ptA3Ya9E
If I am wrong and they are charged, they will be fined/pay restitution of less than $5 million and spend 6 months or less in jail.
