The FDIC did not cover the locked funds because the failure of the fintech middleman, Synapse, did not trigger FDIC insurance. The FDIC insurance is meant to protect depositors of a failed bank, not nonbank entities like Synapse2. The situation revealed the limitations of the FDIC safety net in the context of fintech-bank partnerships.
Fintech promised its customers the best of both worlds: the innovation, ease of use, and fun of the newest apps combined with the safety of government-backed accounts held at real banks2. The startups prominently displayed protections afforded by the Federal Deposit Insurance Corporation (FDIC), lending credibility to their novel offerings.
The collapse of financial middleman Synapse has impacted over 100,000 Americans with $265 million in deposits, leaving them locked out of their accounts1. The fallout has revealed the vulnerabilities in the banking-as-a-service (BaaS) partnership model and has raised questions about regulatory oversight in the fintech industry.