The collapse of Synapse is a significant blow to fintech. The horrible stories coming out about frozen money for mortgage downpayments, college funds, teenage savings and many more are heartbreaking.
People trusted a fintech would handle their money responsibly, that working with a bank partner that had FDIC insurance meant that their money was safe. And while this does not seem like an FTX-type debacle where money was taken and used for other things, there has been gross negligence here.
I don’t think it is an exaggeration to say that this is the worst thing to happen to the fintech industry in its entire history. It is worse than the “Mother’s Day Massacre” in 2016 that saw the ousting of the LendingClub CEO, which caused a long, lost couple of years for the entire online lending space.
The Synapse fiasco has been a slow-moving trainwreck over 18 months that has culminated in the bankruptcy of a fintech middleware company and the inability to reconcile FBO accounts. This has meant that the customers of dozens of fintechs no longer have access to their money.
It is hard to overstate the seriousness of the situation here. The CFPB and other regulators are likely going to take action and we could even see Congress get involved. We are nowhere close to the end of this story.
I will leave it to others to opine on the latest developments (you should be following Jason Mikula here, who is staying on top of the news), what I want to do today is remind everyone of the good that fintech has brought.
When I first started writing about this industry in 2010, Stripe did not exist, Simple was trying to get off the ground as the first digital bank, there was no Chime (Chris Britt was still working at Green Dot), mobile banking was not yet a thing, online personal loans were just getting going as was online small business lending.
We have come a long way since then.
So, while fintech is probably going to be dragged through the mud in the coming weeks and months on Capitol Hill, I wanted to remind everyone of how much positive impact that fintech has brought to the world.
Here are some of my favorite fintech developments:
- Mobile banking—Do we really think banks would have fully-featured apps today were it not for fintechs pushing the envelope here? Their initial forays into mobile banking were like their initial banking websites, replicating the branch experience onto a phone. Today, having followed fintech leaders like Chime, PayPal, CashApp, SoFi, and MoneyLion, all the major banks have excellent mobile apps.
- Buy Now Pay Later – Whatever you think about BNPL, it has taken the world by storm in the last decade. Consumers love it with millions using this payment method every month. Many banks are now getting involved due to this consumer demand but once again fintech has made this possible.
- Earned Wage Access – We still live in the anachronistic world of weekly, semi-monthly or monthly salary payments. In a world of APIs and on-demand everything, this is silly. The EWA fintechs have addressed this problem, and it may well be the most important financial health innovation of the last decade, as millions have avoided expensive payday loans by simply being able to access their earned wages.
- Cash flow underwriting – I have been following lending innovation closely now for 14 years and I think cash flow underwriting is the most important development we have made for financial inclusion. Being able to look at detailed bank history provides more people access to credit as well as better prices for thin-file consumers. It is not mainstream yet but it will be soon.
- Free stock trading – The retail investor frenzy that we have seen since the start of the pandemic would not have been possible without the advent of free stock trading. Again, fintech led the way here and all the traditional players eventually followed suit. This has opened up stock investments to a much broader slice of the market.
- Digital identity verification – Much of today’s world of digital finance would not be possible without robust identity verification and fraud prevention systems. Being able to open an account and start moving money relies on sophisticated digital systems that can authenticate a device and ensure, with considerable accuracy, that the user is not a criminal.
- Spend management – This is a category that was not really a thing a decade ago. But managing expenses for businesses was a significant pain point until the likes of Brex, Ramp and Navan came along. With a fanatical attention to user experience these companies have become unicorns many times over and saved businesses thousands of hours in the process.
- Real-time payments – What started with PayPal, then Venmo, Zelle and CashApp, led to the consumer expectation that payments could be free and instant. While true instant payments have taken a long time to develop in the U.S., fintech laid the groundwork here that has led to the creation of RTP and FedNow.
- Cross-border payments – Staying with payments, the rise of Wise, Airwallex, and Payoneer has completely upended the traditional international money transfer market. These companies have taken billions of dollars in costs out of the system while also delivering payments around the world quickly and reliably.
- Small business capital – After the financial crisis, banks all but exited the small business lending space. This led to the rise of companies like OnDeck, Kabbage, BlueVine and Funding Circle who were able to fill this gap. Today, established tech companies like PayPal, Square and Shopify are some of the largest lenders to small businesses. Banks continue to struggle to serve this space.
Those are just ten innovations. I admit there are dozens more that could easily have made this list. My purpose here is not to create the definitive list of top 10 fintech innovations but, instead, to remind everyone that finance would look very different today without the rise of fintech.
None of this is meant to minimize the damage being done to consumers due to Synapse’s collapse. But it is a reminder not to throw the baby out with the bathwater. Fintech has done, and will continue to do, great things for consumers and businesses.
