The rise of fintech has transformed the financial landscape, offering greater accessibility and convenience. However, the increasing reliance on nonbank fintech firms has exposed new risks, as demonstrated by the Synapse crisis, which revealed serious vulnerabilities and regulatory gaps in the sector.

What is Fintech and Its Risks?

Fintech refers to technology-driven financial services like mobile payments, online lending, and digital banking. While fintech offers benefits, it also introduces several risks:

• Regulatory Gaps:
  Nonbank fintech firms like Synapse operate in regulatory gray areas, often lacking the strict oversight banks receive.
• Operational Risks:
  Fintechs are highly dependent on technology, making them vulnerable to cybersecurity threats, data breaches, and system failures.
• Consumer Protection Issues:
  Insufficient regulatory oversight leaves consumers exposed to fraud and financial loss, especially those with limited financial literacy.
• Liquidity and Insolvency Risks:
  Many fintechs rely on venture capital or short-term funding, making them susceptible to liquidity crises. If they fail, recovering consumer funds can be difficult.
• Jurisdictional Risks:
  Operating across multiple legal frameworks complicates fund recovery and legal disputes in a crisis.

The Synapse Crisis: A Case Study

The Synapse crisis exemplifies the risks of relying on fintech companies outside the traditional banking system:

• FDIC Insurance Gap:
  In June 2023, the FDIC confirmed that fintech firms like Synapse are not covered by FDIC insurance, leaving consumers vulnerable in case of bankruptcy.
• Regulatory Oversight:
  The Federal Reserve’s passive role highlighted fragmented regulatory oversight. While the Fed supervises partner banks, it doesn’t regulate fintechs directly.
• Bankruptcy and Lack of Intervention:
  After Synapse’s bankruptcy, regulators failed to intervene, showing a lack of coordination and support for affected customers.
• FDIC’s Proposed Rule:
  In response, the FDIC proposed new rules to improve record-keeping for fintech customers to help with fund recovery, but these rules are still under development.

The Bigger Picture: 'Lost' Money in Fintech Apps

The Synapse collapse underscores a critical risk for consumers using fintech apps like Yotta, Juno, and Copper—the loss of account access. Since May 2023, over 100,000 customers have been locked out of their accounts as small banks involved in "banking-as-a-service" failed to properly manage unregulated partners like Synapse. Synapse’s role as a middleware provider meant that fintechs pooled customer funds into a single account at partner banks, with Synapse managing transaction ledgers. However, none of the banks involved maintained a copy of the ledger, leaving the partner fintechs and banks entirely reliant on Synapse’s records. When Synapse declared bankruptcy, it became clear that no one had a definitive list of who was owed what, leading to up to $96 million in missing funds. Without clear records, consumers face an uncertain future in trying to recover their money. FDIC insurance, typically a safeguard for traditional bank customers, is not available for these fintech accounts, and without proper ledgers, recovery efforts are nearly impossible.

Conclusion: The Need for Reform

The Synapse crisis highlights the dangers of using fintech services that lack the protections and oversight provided by traditional banking institutions. Key reforms are urgently needed:

• Consumer Protections:
  Clear insurance coverage for fintech deposits and better safeguards against fraud.
• Stronger Oversight:
  Regulatory frameworks must be improved to ensure fintechs adhere to consumer protection laws.
• Coordinated Response:
  A proactive regulatory approach is needed to address fintech failures and better protect consumers.

Cyber Risks and Financial Losses: A Growing Threat

Cyberattacks are a growing concern for financial institutions, and the fintech sector is no exception:

• Surge in Cyberattacks:
  Cyberattacks have more than doubled since the pandemic, leading to $2.5 billion in financial losses.
• Financial Sector Vulnerability:
  Financial institutions, especially banks, are prime targets due to the sensitive data they handle. Cyberattacks can lead to reputational damage and market instability.
• Third-Party Risks:
  Increased reliance on third-party IT providers heightens systemic risk, as seen in the 2023 ransomware attack that affected 60 credit unions.
• Need for Stronger Governance:
  Financial firms must strengthen their cybersecurity policies and governance frameworks to mitigate growing risks.

Gold as a Hedge Against Cyber and Financial Risks

In light of rising fintech and cybersecurity risks, gold offers a reliable hedge to protect wealth:

• Physical Asset:
  Unlike digital assets, gold is immune to cyberattacks and system failures, making it a stable store of value.
• Protection from Cyber Threats:
  Gold does not rely on digital infrastructure, offering security in times of financial or technological instability.
• Privacy and Security:
  Physical gold offers privacy, with no exposure to third-party risks or surveillance.
• Hedge Against Financial Instability:
  Gold has historically served as a safe haven during financial crises, inflation, or currency devaluation.
• No Counterparty Risk:
  Gold does not depend on banks or financial institutions, making it a secure asset during periods of economic uncertainty.
• Diversification:
  Holding physical gold diversifies investment portfolios, reducing exposure to the risks of the digital and fiat financial systems.

Gold provides a proven strategy to hedge against the risks associated with fintech, cyberattacks, and financial system instability, ensuring long-term protection for your wealth.

Why It’s Critical to Act Now

As we enter the holiday season, many are reflecting on the themes of "It’s a Wonderful Life", where the safety of deposits at a bank is tested during a crisis. But in today’s world, the risks extend beyond traditional banks to the growing fintech sector, where protections are not as clear or as robust. Consumer awareness is key—especially regarding fintech platforms that pool customer funds and depend on unregulated, third-party partners to manage finances. Without the right oversight, your money could be at risk, and recovery efforts could be fruitless.

At St Joseph Partners, we strive to help protect your finances and ensure that you are aware of the hidden risks in today’s digital financial world. Gold remains a stable, physical asset that can help safeguard your wealth from the growing uncertainty of the fintech and cybersecurity landscapes.

Stay informed. Stay protected.

Call us at 610 326 2000 and we can help you make an allocation to gold and silver, protecting your finances in a platform outside of the risks of the banking and fintech markets.