Why do people keep losing money from schemes, scams, and ‘too good to be true’ offers in what is probably one of - if not the most - heavily regulated sectors of the economy?
2024 saw a continuing increase in fraudulent
scams and a parade of disappointing (or damaging) online product offerings, including in the
financial services marketplace. As for those underperforming or failing products offered, many might not be classified as actual scams, but they still fell far short of fulfilling their initial promises and customer expectations.
Many victims of outright fraudsters - and those who in the recent past and going forward will continue to become their unwitting targets - sign up for seemingly rewarding but ultimately less-than-stellar, even money-losing, or (in some cases) heartbreaking,
crisis-inducing, and life-threatening product pitches. Most might have avoided (or could avert in the future) the pain, worry, and in many cases, deep and lasting financial and emotional losses involved by simply ‘walking away’ from risky or
unusually lucrative (or ‘flexible’) propositions. But doing so isn’t easy for all in the face of relentlessly and attractively marketed financial products, with strong perceived potential benefits, even if the steps involved in evaluating ‘hot’ offerings
might seem obvious to more risk-averse or cautious individuals.
The
Synapse failure is an example of what can go wrong, and how badly marketing overstatements, misstatements or misunderstandings of agreements, or ignorance of actual risks posed can end up for ‘connected’ customers, whether they knew it or not. The Silicon
Valley-backed company’s bankruptcy last April saddled thousands of clients of scores of fintechs using its ‘middleman’ balance reporting and management ‘services’ with lengthy delays to access their funds.
Synapse’s debacle illuminates what could, at best, be called a ‘gray area’ in the banking and finance world. The US Federal Deposit Insurance Corporation (FDIC) says it
can’t cover any losses from Synapse’s collapse because no bank failure occurred. They assert that customers of fintechs involved with Synapse, including from
Yotta, Juno, and others, did not have direct account relationships with insured banks under its purview. Meanwhile, clients of these fintechs, waiting, in some cases, for nearly nine
months for access to their ‘frozen’ funds, are incensed because they believed FDIC insurance was in place to protect against losses, and they’re not sure when, if ever, they will find a solution to reinstate all, if not most, of their ‘missing’ or long-tied-up
funds.
Research beyond the ‘envelope’ when it comes to money you can’t lose
Now more than ever, “caveat emptor,” or “buyer beware,” is the ‘phrase that pays’ for wise banking and investing. Certainly, when one’s principal income source, or large sums of money, are involved, extra research is required, even if the marketing claims
say, “don’t worry, we’ve got you covered.”
Sure, if you’ve made a choice of a new financial provider or incentive offering and the results turn sour, you can always file a
lawsuit after the fact. But it’s always better to conduct rigorous due diligence up front, just as you would research any product or service, before taking the leap with any financial offer that promises benefits stretching well beyond those typically available
in the marketplace.
There are approaches to evaluating product and service claims which may not be fail-safe, but which certainly are capable of usually prompting instinct-triggering questions about some of even the most legitimate-sounding product pitches and claims. This is
especially true for companies or online apps representing them where you plan to deposit your hard-earned money.
This is a very tough pill to swallow for those hurt by online scams or undelivered promises from new-on-the-scene financial services providers. There are indeed many legitimate online financial services providers which are forthright in their operations
and advertising. To verify any claims made by them and others, in fact, in every case, whether brick and mortar or online, it’s important to go well beyond the marketing ‘hype’ and basic reviews initially conducted for banking companies.
By completing a few more steps of deeper research, exaggerated or incorrect statements alluded to by victims in the Synapse case might have been illuminated and agreements to do business avoided before they even started. This is the case even if (or especially
if) the service offering in question was promoted as being ‘innovative,’ ‘groundbreaking,’ ‘fun,’ ‘contests,’ ‘free gifts,’ or ‘gamified’ - compared to the oft-described ‘boring’ or ‘old-fashioned’ or ‘standard’ banking and savings solutions available.
Bogus claims often are contradicted, or ‘walked back,’ in the ‘fine print’
Some ‘opportunities’ - advertised online or in the traditional economy – are much more obviously and apparently bogus than others. It’s fair to say that some of the victims of the Synapse bankruptcy wondering now about their share of original balances totalling
nearly $160 million in missing “for benefit of” (FBO) (deposits held and managed for benefit of another party’s customer, ironically, similar to how ‘trust’ funds work) are still wondering whether they’ll ever see most or all of their precious funds. They
may or may not, as the unwinding of Synapse’s records is still all tied up in
court amid back-and-forth
attacks between several of the parties involved. No matter what happens with the Synapse debacle, however, there are surely lessons to be learned by all from its ‘captive clients’ and their unfortunate experiences.
In the case of Synapse, the vast majority of consumers and others using their intermediary services actually didn’t choose to do business with the prominent venture capitalist-backed firm. Instead, the company convinced selected bank providers like Evolve,
American Bank, AMG National Trust, and Lineage Bank and hundreds of connected fintech service/product platform companies to establish what ended up as very complex, multi-party financial relationships requiring very detailed recordkeeping at every step and
stage. Sadly, these convoluted connections – when they fell apart along with Synapse itself amid a collapse in that reconciliation process, ended up being the worst news, maybe ever, for thousands of clients of scores of fintechs and their banking partners.
Many have now been ‘made whole’ financially despite early concerns of losses, while most fintechs involved have quickly distanced themselves from the failing Synapse and its FBO service partners. However, for those who still face unexpected shortfalls they
can’t afford in their personal financial portfolios, answers aren’t easy to find, whether from the court system, or from federal regulators.
Could victims of Synapse’s failure have avoided all their pain and loss?
Asked now, most victims of these ill-served financial relationships, even those who eventually regained use of their funds after lengthy holds, or perhaps “only” lost some of their money, might agree that they’d think twice now before looking again into exceedingly-promoted
alternative choices to traditional financial services companies like banks and credit unions. However, for those who haven’t learned tough lessons from the ordeal or believe they can find remedy in expensive legal actions, it’s a troubling sign of just how
powerful marketing and hype really are, and how supposition and guessing truly have no place in decisions taken when it comes to one’s financial resources.
The sad truth is that many people ignore warning signs (in financial affairs and otherwise) or never even consider that what they think is exciting about a pitch they hear from a friend, or likely viewed online - especially via social media or ‘trusted’ online
special interest forums - might not be true, and certainly not ‘thrilling’ in the end at all. If they do proceed to forge relationships with these sketchy companies offering unspecified, misstated, or unclear financial arrangements, is it because they were
misinformed – intentionally or otherwise, haphazard and perhaps greedy in their evaluation and decision process, in denial of their own responsibility to conduct due diligence, or just not very savvy in general when it comes to financial matters? Or maybe
a combination of several of these factors, depending on the person?
Caveat emptor indeed – and the FDIC says “don’t turn to us for relief”
It is not always simple to answer these questions, because some of those now still waiting since last April to see their hundreds or thousands of dollars invested in Synapse-connected companies and apps online returned to them say they
did do proper checking of sales and marketing claims made up front.
For example, some clients impacted, including individuals working elsewhere for companies in the financial services industry themselves, say that they had carefully researched the marketing and operational ‘fine print’ provided by "neobanks” or “financial
apps” offering ‘cool new products’ and more exciting ways to save and invest. They and a burgeoning group of fellow victims assert that it’s wrong that
FDIC insurance refunds will likely not be provided for their FBO accounts held with certain fintechs doing business indirectly (on their behalf) with Synapse, even though its partner banks
were themselves FDIC-insured – at least on a “$250 thousand per relationship” basis.
Instead, they state that the FDIC’s stance is incorrect, and that the accounts they felt were covered by the agency’s insurance were - to their understanding - eligible for coverage. Plus, they assert they shouldn’t be penalised just because they pursued gamified
(‘fun’) options for banking and investing. Certainly, the regulator’s stance runs contrary to many Synapse victims’ expectations due to the promises they point out were made to them on websites and even in the ‘fine print’ of their customer agreements by their
chosen online financial providers.
The problem, or disconnect, the FDIC says, is the
FBO arrangements detailed and undertaken by their fintech providers with Synapse and ultimately the banks holding the deposits do not qualify under clearly defined depositor insurance rules, even for ‘pass-through” accounts, without clear records to prove
it. In fact, they may not do so in the future either, without
announced but potentially delayed
major changes in rules for banks partnering with fintechs (amid likely additional waiting time for remaining Synapse-related funds to be returned to fintech customers) in this government protection program that has been around since the Great Depression.
How to avoid becoming a victim in the future? Ask “Why, How, and can you prove it?”
Synapse is just one example of many arising almost daily demonstrating that it’s now more important than ever to ‘read the fine print’ in any offer. In some cases, consider that even with that fine print, the company promoting something too good to pass up
just might be ‘fudging the facts’ or overenthusiastically exaggerating a product offering that has more holes in it than Swiss cheese. If that company isn’t actually regulated by government entities and expressly stated policies, then you can likely expect
clear answers to be even more difficult to get. Not impossible but surely requiring more on your part to find them.
Is it really that difficult to select a legitimate, secure banking or investment provider online? There are many outstanding, innovative, and growing financial technology firms with strong, well-defined propositions and growing client rosters – not to mention
rock-solid banking partners.
How can a consumer or small business manager differentiate the long-term, legitimate players from the posers and pretenders pushing poorly conceived, hastily designed service and compliance standards or weak contingencies for when a link in their partnership
chain (such as occurred in the case of ‘middleman’ Synapse’s case) shatters?
We’ll talk more about that topic in our next story in this series.