The Gap Between Fintech's Sensationalized Portrayal and Practical Applications
2024 marked the year of fintech's downfall.
The shutdown of fintech companies such as Synapse and Tally exposed a disconcerting truth about the industry's failures: often, these "new" innovations are merely dressed-up versions of antiquated systems. These solutions frequently offer little protection for consumers, despite the promises of revolutionizing financial services. It's alarming that many of these supposed advancements heavily rely on outdated legacy infrastructure, concealed behind a sleek front-end.
These failures exposed a critical discrepancy between the customer-facing promises of fintech and the opaque, outdated systems supporting these solutions. When fintechs fail, the blame isn't solely on the companies; consumers often suffer the consequences as well. The lessons from these failures underscore the importance of transparency, accountability, and a deeper understanding of the infrastructure supporting seemingly innovative solutions.
The Hidden Hazards of Fintech: Synapse and Evolve's Mishaps
Synapse, a fintech firm, collaborated with Evolve, a company that offered small to open accounts and issued debit cards to customers. At its peak, around 100,000 customers had their funds stored in large, commingled accounts managed by Synapse at Evolve.
Following Synapse's bankruptcy filing in 2024's summer, thousands of customers lost access to their financial assets. Evolve halted payment processing, citing the need to determine how to distribute funds to customers. A month later, a court-appointed mediator revealed the possibility of up to $96 million in fintech customer funds being missing from Evolve and other banks. Consequently, Evolve is now embroiled in lawsuits related to the missing funds.
Both sides are casting blame, each accusing the other of responsibility.
This scenario illustrates the complexities inherent in the so-called fintech "innovation." While many fintechs claim to offer cutting-edge banking products, the truth is that most rely on old-fashioned lenders like Evolve to operate discreetly in the background. This practice, referred to as a "for the benefit of" account or FBO, involves a third party—such as Synapse or the bank itself—opening and managing an account at a bank like Evolve for another party's benefit.
A partnership founded on shaky ground
Consumers who suffered as a result of Synapse's collapse were likely unfamiliar with Evolve. What's more confusing is that, while Evolve is insured by the Federal Deposit Insurance Corporation (FDIC), deposit insurance did not extend to customers when Synapse declared bankruptcy. This is because Evolve is not the one that failed; it was Synapse.
The Synapse collapse underscores a fatal flaw in fintech innovation. Even though a solution appears novel, it may still rely on legacy systems. Unfortunately, the regulatory protections afforded to these traditional banking institutions powering the back-end do not always extend to the customer-facing front-end. Caveat emptor.
The Demise of Bench: Guidance for Fintech Startups
Bench, a Canadian accounting startup providing tax solutions for small businesses, ceased operations at the end of the year. The company had raised $113 million in venture capital funding from prominent investors like Bain Capital Partners, Shopify, and Altos Ventures. The abrupt news left numerous business owners scrambling for alternative tax planning and preparation services during the holiday period.
Bench, once a promising player in the cloud accounting space, aimed to provide low-cost bookkeeping services to a wider audience. Despite raising $60 million in funding only a year prior, the company failed to gain significant market share against traditional accounting firms. Bench never managed to create a sustainable, profitable business model.
Customer feedback highlighted several issues with the service. Some complained that Bench relied heavily on machine learning with minimal human oversight to assess financial statements and categorize transactions. Others discovered numerous errors during client audits for previous years. These mistakes likely cost clients significant amounts.
Bench's financial challenges became evident in its recent pricing strategy. A sudden 50% price hike, accompanied by a requirement for customers to commit to an annual subscription and provide only 48 hours' advance notice, suggested urgent cash flow difficulties. The hurried and reactive nature of these changes raises questions about the company's underlying financial health and the length of time it had been experiencing operational strain.
Why Human Oversight Remains Crucial in AI-Driven Solutions
The failure of Bench serves as a stark reminder of the dangers of over-relying on technology to replace human expertise in detail-oriented fields like accounting. While machine learning and automation may not always match experienced professionals' level of judgment and insight, they can still play a valuable role. However, fintech startups must strike a delicate balance between innovation and quality human oversight. Swift fixes for deeper problems should be approached with caution to avoid compromising the company's reputation and future growth.
Fintech's future hinges on successfully integrating technology with dependable infrastructure to protect consumers. Innovation must go hand in hand with transparency, consumer protection, and sound business practices. It's not enough to secure venture capital funding first, then figure out a sustainable operating model later. To succeed, fintech solutions must be built on solid foundations – not just flashy promises.
In the aftermath of Bench's closure, investors like Bain Capital Partners and Shopify had to reassess their investment strategies in the fintech sector, acknowledging the importance of balancing innovation with reliable human oversight.
Despite the promise of AI and machine learning in fintech, as demonstrated by Bench's heavy reliance on such technology, human expertise remains crucial in ensuring accuracy and preventing costly errors. These lessons underscore the necessity for a transparent approach to fintech development, prioritizing consumer protection and solid business practices to ensure lasting success in the industry.
