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FDIC Warnings and ‘False’ Deposit Insurance Claims Spotlight Non-Bank Risks

The headlines swirl around Synapse’s bankruptcy and customers’ tales of being frozen out of their accounts.

The FinTech space is always evolving, and the ongoing legal wrangling and attempts to find $85 million in account shortfalls will seemingly be long and drawn out, with no real telling (yet) whether the efforts will be fruitful. As noted in our coverage of the bankruptcy hearing and paths forward, partner banks are seeking ways to reconcile accounts and ledgers.

The Federal Deposit Insurance Corp. (FDIC), in the meantime, is mentioned repeatedly in traditional media outlets and via social media channels, with questions asking whether the FDIC offers up a backstop here. But because Synapse is not a bank — and is not FDIC insured — it’s not regulated by that body.

The company has also disclosed in customer agreements that funds that are withdrawn from its Brokerage operations may not “be eligible to be covered by FDIC insurance.” Elsewhere, no banks have failed in this case, so there’s no FDIC insurance backstop that would be tapped.

There are some indications that the FDIC is taking a harder look at the FinTechs, at non-banks, and the risks tied to some of those companies.

In the past week, via a consumer warning and through a series of “cease and desist” orders stretching back through the past few months, the FDIC has been warning of those risks.

The FDIC earlier this month issued a consumer news bulletin that noted: “Increasingly, some consumers are choosing to open accounts through nonbank companies (typically online or through mobile apps), such as technology companies providing financial services (often referred to as fintech companies), that may or may not have business relationships with banks. If and how a bank is involved is key to understanding whether or not your money is protected by deposit insurance. However, in some cases, it is not always clear to consumers if they are dealing directly with an FDIC-insured bank or with a nonbank company.”   

And, the FDIC added, for the consumers who open an account with a non-bank company that says it deposit customers’ money in an FDIC-insured bank, “will you be eligible for FDIC deposit insurance coverage? The short answer is: it depends.” 

Funds sent to a non-bank company are not eligible for FDIC insurance “until the company deposits them in an FDIC-insured bank and after other conditions are met.”

Cease and Desist Letters

Separately, beyond the consumer warning noted above, a look at the “Laws and Regulations” tab of the FDIC’s site reveals that a number of firms have been issued “cease and desist” letters for violations of sections of the Federal Deposit Insurance Act.

The act prohibits individuals and entities from “making false or misleading representations about deposit insurance, using the FDIC’s name or logo in a manner that would imply that an uninsured financial product is insured or guaranteed by the FDIC, or knowingly misrepresenting the extent and manner of deposit insurance.”

Through the past few months, the letters have been issued to companies like Prizepool, AmeriStar and virtual wallet firm Organo Payments.