Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
When A Neobank Goes Bankrupt What Happens to the Customers?
Fintech Business Weekly | | Jul 31, 2022
After an incredible bull run in fintech startups powered by ultra low interest rates and cheap, plentiful capital, many companies are getting an overdue reality check. Investors’ priority has abruptly shifted from “growth at all costs” to “do the economics work”?
The impact of this shift has only begun to be felt across the ecosystem. We’re likely to see more M&A activity and, yes, outright failures as startups struggle to raise new capital.
What happens to the customers of failed fintech startups?
- This is a particularly important question for neobanks. Companies like Chime, Varo, and Current have aggressively courted users — many of whom are lower income. They’ve incentivized users to make the services their “primary” bank account, with features like early direct deposit and no-fee overdrafts.
See: N26 addresses neobank’s culture struggles
- Customers use these accounts to pay rent, buy groceries, put gas in their cars, etc. — and many would have few other ways to pay, if the funds in their neobank account were inaccessible.
- FDIC insurance protects deposits from a failure of the bank partner holding them, but the failure of a consumer-facing neobank or BaaS platform could nonetheless result in disruptions to consumers’ access, if not handled methodically. This isn’t purely theoretical — a number of neobanks have already wound down.
- For example, Beam Financial, which was purportedly a high-yield savings app, collapsed amid regulatory action from the FTC, leaving users unable to access their funds.
- LendUp enters liquidation but instead of a typical bankruptcy filing — which would make details of the company’s failure public — LendUp opted for an “Assignment for the Benefit of Creditors,” (ABC) a non-judicial alternative to a public bankruptcy.
Impact to customers
- Frustrations at not being able to transfer funds also popped up on social media
- Multiple new users attempting to open accounts complained of not being able to do so, encountering “errors” when attempting to verify their information
Read: Behind tech layoffs lay systemic cash flow negative companies
- These developments come on the heels of escalating scrutiny of “banking-as-a-service” business models.
Continue to the full article --> here
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