I woke up this week to a LinkedIn post from Jan Sedlacek, co-founder of fintech company Stryber, that I have seen in various forms before. Basically, large, legacy corporations find it very difficult to innovate. He wrote that positioning disruption as an “opportunity” is like telling the passengers of the Titanic that the incoming iceberg is a chance to make margaritas. It’s an amusing comparison. After all, writes Sedlacek, no matter what the strategy towards disruption, “the Titanic always sinks”.
However, my focus is more on the iceberg than a doomed ocean liner with three classes of ticket holders. Does the iceberg understand what it means to transport thousands of people to a different continent? (Obviously not, and I may be taking this metaphor too far — after all, that iceberg faces its own disruption in the form of climate change and realities of melting).
What metaphor would you use to illuminate the strategies of the disruptor, rather than the disruptee, when they are brought down by market forces, lack of experience or just bad luck? These are the questions many asked last year when Silicon Valley Bank took a nosedive after a bank run caused by social media rumours.
The US market has thrown us another cautionary tale in the world of fintech companies, their growth-at-any-cost customer base, and their banking relationships. The bankruptcy of San Francisco-based, banking-as-a-service provider Synapse has been described as a “mess” and a “debacle” in the press and prompted several LinkedIn warriors to explain exactly who and who isn’t protected by the US Federal Deposit Insurance Corporation.
For those of you not following the news, Synapse filed for a Chapter 11 bankruptcy — reorganisation — in April of this year. Having raised over $50mn in venture capital, including from Silicon Valley powerhouse Andreessen Horowitz, over its lifetime, it had planned a desperate sale to TabaPay for $9.7mn, but that fell through, causing the company to seek liquidation under Chapter 7.
However, Synapse is a BaaS provider. Based on Synapse’s filings, around 100 fintechs and 10mn end customers are potentially impacted by the company’s collapse, and as much as $160mn in customer funds on those platforms are now frozen and inaccessible. Many of these firms advertise their services as “FDIC protected”. However, as these US fintech customers are finding out, that protection claim is a bit more complicated.
Synapse is a BaaS platform, not a bank. They offer BaaS services to other fintech companies, but the underlying funds reside in a “for the benefit of” or FBO account at a regulated bank. In the past Synapse had a relationship with Evolve Bank, which ended their partnership late last year (Evolve Bank has been dealing with its own data breach drama of late as well). The customer funds in those banks are protected by FDIC, in the case of bank failure. However, those banks have not filed for bankruptcy — the BaaS provider has.
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The records of FBO funds are not required to be maintained by the bank, but instead by the fintech entity. If those records are not well maintained, or if those funds are intermingled with assets from other partners, access to those funds, in the event of a calamity (an iceberg?) becomes difficult.
There are many opinions on this ongoing fintech disaster in the US. Does this spell the end of the promise of BaaS as a business model? How can consumers be ensured that their funds do fall under FDIC protection — especially if a fintech company advertises that is the case?
As I write this many customer accounts, at various fintech companies which had a relationship with Synapse, remain frozen. One of the most common questions I am asked is whether these fintech companies are above board, are they a real bank — at the end of the day is their money safe, like at a bank?
The Titanic wasn’t sunk by an iceberg, it was sunk by hubris, a lack of planning and lifeboats as well as an obsession with speed and growth over all — at the expense of passenger safety. That sounds more like the behaviour of a fintech start-up than a legacy player.
