Broadly, there are two three types of online financial services:
- Those started by established, regulated banking institutions;
- Startups (e.g., Lending Club) that have purchased a bank and become a regulated institution; and
- Startups that are unregulated.
Category 3 may have relationships with banks, but any money placed with them isn’t necessarily insured by the FDIC. The lack of insurance may not be clear to consumers and businesses that place money with them.
The difference doesn’t matter until something blows up, as in did in April of this year. A software firm that provides the interconnection between some of the startups and their banking partners, Synapse, declared bankruptcy and took some of its software offline rather abruptly, isolated 100,000 American individuals and businesses from their money.(1) That’s $265 million in deposits. When, if, and how depositors might recover these funds is unclear at this time.
85% of the depositors affected where those with accounts at a startup called Yotta. However, in the bankruptcy filing, Synapse reported service 100 fintech startups.
Synapse is far from the only fintech failure.(3) The list includes:
- Wonga (UK, 2018)
- Lendy (UK,2019)
- Beam (2020)
- Moven (2020)
- Celsius Network (crypto, 2022)
- Mogo (Canada, 2022)
- Daylight (2023)
- Bolt.
Basically, when you give someone money, you need to know with whom or what you are dealing. The old slogan used to be “trust and verify”. Maybe it’s better to skip the trust and go directly to verify…
Source: FDIC Insurance and Fintech Failures: What You Need to Know – CRAIN’S COMMENTS

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