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What Happens to Your Money When Your Fintech Company Goes Bust?
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When fintech companies fail, customers often discover a shocking truth: Their money wasn’t as protected as they thought. More than 100,000 Americans with more than $2.5 billion in deposits found themselves unable to access their fintech accounts after Andreessen Horowitz-backed “banking-as-a-service” startup Synapse Financial Technologies Inc. collapsed in 2024 . Live players connect fintech applications with traditional banks.
Many people are still waiting to get their money back. So the uncomfortable reality is that your money may not be as protected as you think. While many of these applications show the Federal Deposit Insurance Corporation (Federal Deposit Insurance Corporation) mark, experts and the FDIC have clarified that when it comes to whether the money you hold with a fintech company is protected, the answer is “it depends.” Even a partnership with a traditional bank doesn’t guarantee the safety of your money if a fintech company goes out of business.
With a whopping $96 million of customer funds unaccounted for in the Synapse bankruptcy alone, it’s critical to know exactly what will happen to your money if your fintech company fails.
Main points
- FDIC insurance may not protect your money in fintech apps, even if they work with traditional banks.
- If a fintech goes bankrupt, your funds may be frozen or unavailable.
- Different types of fintech services offer different levels of protection – payment apps, investment platforms, digital currencies and digital lenders each carry specific risks, many of which (particularly those in the fintech space) cryptocurrency space) provides no protection at all.
What are the risks?
Depending on the type of fintech service you use, the degree to which your money is protected will vary greatly. Payment apps that hold funds for transfer may offer different safeguards than investment platforms or digital lending services. Here’s what you need to know about each:
Payment and banking apps
These services often work with traditional banks but may pool customer funds in special accounts, making it difficult to track individual deposits. While the company advertises FDIC coverage, this protection only applies if a partner bank fails, not if the fintech company itself goes bankrupt. Recent cases have shown that during bankruptcy proceedings, customers may not be able to get their money back for weeks or months.
Crypto Platform
The crypto world provides some of the most high-profile examples of fintech failures. When cryptocurrencies are exchanged Fortis The 2022 crash saw customers lose billions in funds they thought were safely stored. (The company’s notorious former CEO, Sam Bankman-Fried, served decades in prison for deceptively leading many people to believe so.)
Unlike traditional financial services, crypto platforms do not However Any government-backed protection. When these tokens fail, customers often become unsecured creditors, meaning they are the last to get their money back – and in rare cases, they get nothing.
investment app
Investment platforms usually offer Securities Investor Protection Corporation (SIPC) Insurance coverage, which protects against broker failure, does not protect against market losses. However, cash awaiting investments or sales proceeds may be held in a manner that does not qualify for FDIC or SIPC protection. Risks in this area become more severe when platforms use complex structures involving multiple entities.
In 2024, the FDIC launched a system to monitor fintech companies that partner with banks to provide financial services. A proposed rule would require stricter requirements for bank recordkeeping of deposits received through third parties, including fintech companies. Another one will expand what is Brokerage Deposits– This brings tighter regulations and higher costs to banks. However, with changes in FDIC leadership and the arrival of a new presidential administration in January 2025, much remains unresolved.
How to protect yourself
- Use fintech apps as tools, not as your primary bank. Keep your primary account with an FDIC-insured traditional bank.
- Never keep more money on any fintech platform than you can afford to lose access to, at least temporarily.
- Screenshot or download monthly statements and transaction history from fintech apps.
- Diversify your investments across multiple financial institutions rather than concentrating your money in one place.
- Check whether your fintech holds a banking license directly or simply partners with a bank without providing you with FDIC and other protections.
- Keep records of how you verified your identity through the Platform; you may need them Bankruptcy Proceedings.
bottom line
The convenience of fintech apps also comes with hidden risks that many users don’t discover until it’s too late. While digital banking platforms promise innovation and convenience, they often operate in a regulatory gray area that can put your money at risk. As federal regulators increase scrutiny of these services, the safest approach is to treat fintech platforms as useful tools while maintaining primary banking relationships with traditional FDIC-insured institutions.
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