Think Fintech Is Safe? This Hidden Danger Could Cost You

Many people are understandably jittery after the high-profile failure of San Francisco-based fintech company Synapse, which caused up to $96 million to disappear overnight from tens of thousands of people’s accounts.

Synapse filed for bankruptcy in April 2024, and—nearly eight months later—many customers have yet to see the money they thought was protected by FDIC coverage. It’s an extreme case, but it highlights some of the hidden dangers of using these increasingly popular banking options. 

Luckily, there are steps you can take to avoid fintechs (like going with our top recommended high-yield savings accounts) or to safeguard your finances while still enjoying the benefits of these apps.

What Happened With Synapse?

Synapse Financial Technologies was a financial company that filed for bankruptcy in California in April 2024. It essentially acted as a bookkeeper between fintech banking services—who aren’t actual banks and thus don’t carry Federal Deposit Insurance Corporation (FDIC) insurance—and actual banks, who are insured. 

This roundabout arrangement allows fintech companies to offer spiffy, high-value banking services without undergoing the time-consuming and expensive process of becoming actual banks themselves. It’s the underlying basis for how most fintech banking apps today actually work. 

Forensic accountants and attorneys are still piecing together what happened, but it’s clear that Synapse wasn’t recording transactions correctly. This resulted in account errors, with many customers unable to access their funds. As of early December 2024, certain customers with many fintechs still hadn’t received access to their money, and the fallout continued to unfold.

How to Avoid Becoming a Victim of Fintechs Like Synapse

The only way to truly avoid a catastrophe like this is to avoid fintech banking entirely. You can do this by working directly with banks insured by the FDIC and credit unions insured by the National Credit Union Administration (NCUA). 

You may have to read the fine print. Be on the lookout for companies that advertise banking services but don’t say that they are FDIC-insured banks or NCUA-insured credit unions (some banks and credit unions offer online banking services—these are not the same as third-party fintechs). These companies will often state outright that they are not banks. And, look out for any company that says it will open a custodial account on your behalf, or a “for the benefit of” account. 

If you do want to work with a fintech, it’ll help to follow a few good practices. 

First, the FDIC cautions against keeping money you need for “your regular living expenses” with a fintech company. Much like investing, it’s a good idea to keep a reserve of funds elsewhere, lest something happen to your main pot. In the unlikely event it does, you’ll still have money to rely on while the mess gets sorted out.

Next, be careful when choosing fintech companies to work with. Here are three points you should be very clear about when opening an account with a fintech company:

• Where your money is deposited: Verify with the FDIC’s BankFind tool that the fintech’s bank partner actually does have FDIC coverage. Skip any fintech companies that partner with banks you already use since you could end up over FDIC coverage limits. 
• When your money is deposited: It’s not insured until the transfer actually takes place. Look for fintechs that transfer your money into an FDIC-insured bank immediately.
• How your deposits are recorded: Check that the fintech company has a way of recording the specific amounts that belong to each person at each bank it uses. If it can’t track that, you may have trouble getting your money even if your funds are in an FDIC-insured bank.