Life comes with its share of costs—rent, mortgage, groceries, gas, and leisure activities all add up. However, what impact does losing access to one’s finances have? Currently, this is the situation for numerous Americans. Thousands of personal and business bank accounts have been frozen for weeks due to an ongoing conflict between the fintech startup Synapse and its banking partners over disputed customer balance amounts.
So what happened to Synapse? Let us analyze and understand Synapse’s bankruptcy and its effect on customers.
What Happened to Synapse? Key Takeaways of Synapse’s Bankruptcy
- Frozen Accounts Affecting 200,000 Users: Synapse Financial Technologies’ bankruptcy has left over 200,000 customers unable to access their funds due to ongoing disputes with banking partners.
- Judicial Intervention: A US Bankruptcy Court Judge appointed an independent Chapter 11 trustee to manage Synapse, aiming to restore access to customer funds, although the timeline remains uncertain.
- Operational and Legal Issues: Synapse’s collapse followed a series of operational failures, management disputes, and legal conflicts with key partners like Mercury and Evolve Bank, leading to widespread service disruptions.
- Regulatory and Consumer Impact: The situation underscores the vulnerabilities in fintech operations, prompting calls for increased regulatory oversight to protect consumers and ensure the stability of fintech services.
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Synapse Financial Technologies’ Collapse Leaves 200,000 Fintech Users Without Funds
In the wake of Synapse Financial Technologies’ collapse, more than 200,000 fintech clients have lost access to their money. Since last year, disagreements over disputed customer balance numbers have arisen with many partners for Synapse, an Andreessen Horowitz-funded business that serves as a middleman between consumer-facing fintech brands and banks backed by the FDIC.
Judge Martin R. Barash of the US Bankruptcy Court (Central District of California) agreed during a recent hearing to hand control of Synapse over to an independent Chapter 11 trustee, removing the incumbent management.
Barash emphasized that his main concern is to restore consumer access to their funds, although he did not specify how soon this might occur. Previously, he attempted but failed to involve federal banking regulators to help resolve the issue. “Getting end consumers their money is the most critical thing right now,” he said, expressing the urgency of the situation. Additionally, he expressed how extremely upsetting it bothered him to hear from people who are struggling to pay for their homes or buy food.
Michael Gottfried, an attorney representing Yotta Technologies, one of the affected fintechs, described the situation as a “house on fire,” underscoring the severity of the crisis for those cut off from their money.
The conflict escalated in April when Synapse filed for bankruptcy after losing several key partners. On May 11, Synapse disabled access to a critical technology system used by lenders to manage transactions and account details. Consequently, users of multiple fintech services have been left without access to their money.
Evolve stated in a release last week that Synapse’s shutdown has “unnecessarily put end users at risk by impeding our ability to verify transactions, confirm user balances, and adhere to legal requirements.” As a bank, Evolve is obligated to ensure all customer deposits are precisely accounted for, a process that could be time-consuming.
Despite the freeze on customer deposits, Evolve confirmed it remains financially stable. Other institutions partnered with San Francisco-based Synapse include Tennessee’s Lineage Bank and Yotta, a savings rewards company that offers prizes to incentivize customers to save.
The impact of Synapse’s operational issues might expand. According to court documents, Synapse estimated it had about 100 customer relationships affecting approximately ten million Americans before declaring bankruptcy. However, banking regulators argue this estimate is significantly inflated, expecting the number of affected individuals to be in the thousands or tens of thousands.
Synapse’s creditors were advocating in court for the bankruptcy to be converted to Chapter 7, which would have resulted in the company’s liquidation. During court proceedings, representatives for Synapse’s customers expressed concern that liquidating the company could further exacerbate the disruptions to accessing funds.
How US banking regulators might influence the situation arising from Synapse’s collapse is still being determined. Synapse is not a bank, so its regulation does not fall under the Federal Reserve or the Federal Deposit Insurance Corporation (FDIC). Additionally, since no banks associated with Synapse have failed, there is no basis for FDIC deposit insurance coverage.
The Consumer Financial Protection Bureau (CFPB), which holds law enforcement powers, might investigate Synapse’s operations and its effects on consumers.
Both traditional bankers and consumer advocates have often criticized the business model of fintech companies, which operate similarly to banks but without regulatory safeguards, as customer funds are held somewhere else.
A Look Behind the Bankruptcy and Consequences
Synapse, founded in 2014, pioneered the “banking-as-a-service” (BaaS) industry. For startups, obtaining the necessary charters and permissions and developing systems to accept deposits, grant loans, and issue debit cards is relatively inexpensive and time-consuming. In 2022, Synapse made the Inc. 5000 list of Fastest Growing Private Companies, ranking in the top 100 Financial Services companies. With 200 employees, the company served 18 million end-users, a 64% increase from the previous year, handled $91 million in transactions annually, an 82% increase, and processed $76 billion in transaction volume, up 43% from the previous year.
Despite its rapid growth, Synapse has yet to achieve profitability, and there are ongoing concerns about its aggressive management style dating back to 2020. The CEO, Pathak, an expatriate from India, was known for his impulsive decisions to dismiss engineers for not working quickly enough. Engineers reported issues with faulty code and disorganized customer databases, leading some neobanks to sever ties with Synapse due to these operational problems.
In the summer of 2022, Evolve, a bank established a century ago in Tennessee, decided to end its sponsorship of Synapse and withheld a $17 million payment to cover a $14 million discrepancy in one of the FBO accounts. The separation process has been protracted and remains unresolved, attributed to Synapse’s difficulties in reconciling account ledgers—an essential banking function typically not complicated by discrepancies and suspicious circumstances.
At the same time, Synapse faced a significant issue with its largest client, Mercury, a fintech company providing bank accounts to small businesses and holding $3 billion in deposits. Mercury claimed that Synapse had underpaid them in “rebates” that should have increased with the rising federal funds rate. This dispute led to ongoing legal action, with Mercury alleging in one lawsuit that Synapse was insolvent and requesting that its assets be frozen to ensure funds would be available should Mercury win the case.
Additionally, Mercury chose to bypass Synapse by forming a direct partnership with Evolve Bank. This move, which circumvented the need for Synapse’s involvement, posed a threat to the banking-as-a-service (BaaS) business model. The combination of public insolvency accusations and this strategic shift contributed to a severe crisis for Synapse.
Synapse had been seeking a buyer for several months before striking a deal with TabaPay, a provider of financial services to fintech companies. To facilitate this transaction, Synapse filed for Chapter 11 bankruptcy reorganization, with TabaPay agreeing to purchase Synapse’s assets for $9.7 million—a sum considerably lower than the venture capital funding Synapse had previously received.
Initially, the plan under Chapter 11 was for Synapse to sell its operational assets to TabaPay, which would have absorbed many of Synapse’s approximately 100 employees and taken over client services.
However, this deal ultimately collapsed. On May 11th, Evolve Bank & Trust, an Arkansas-based bank partner of Synapse, suspended individual consumers’ access to their accounts and debit cards. Evolve stated it was unable to access necessary records at Synapse to verify account balances.
Despite the challenges and reduced staff, Synapse continued to play a crucial role in managing substantial customer funds. During court proceedings, another sponsor bank, Lineage, reported that Synapse managed funds for the benefit of others (FBO) accounts with assets valued between $60 million and $80 million. This did not include the assets held in the Evolve FBO and other bank relations. Liquidating Synapse involves disentangling these complex banking relationships. The overseeing bankruptcy judge, Martin Barash, described the situation as a “hot mess.”
Following TabaPay’s withdrawal from the acquisition, Lineage, which was under a federal consent order for its dealings with fintechs, ceased processing payments for clients of Synapse. Some clients, like Juno, transitioned to Evolve. Concurrently, on May 11, the Synapse dashboard that Evolve used to manage customer accounts malfunctioned. This led to a sudden halt in access to fintech app accounts, with all direct deposits and transactions being returned to the senders.
What Should the Affected Parties Do?
If you’ve been affected and need to file a complaint, contact the FDIC by phone at 1-877-275-3342 or online.
If you want to provide input on fintech regulations, contact the Consumer Financial Protection Bureau by phone or online.
About Synapse
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Synapse Financial Technologies Inc. operates as a banking-as-a-service (BaaS) platform, specializing in creating banking software solutions. The company provides an array of API products across payment, deposit, lending, investment, and finance sectors, enabling clients to develop and launch their banking products.
Synapse aims to simplify the process for users to create and implement financial applications, often referred to as the “AWS of banking.” Their offerings encompass a range of products, including lending, credit services, wealth management, online payment processing, embedded finance, and card solutions.
Conclusion
The collapse of Synapse Financial Technologies has significantly disrupted the lives of over 200,000 users who have lost access to their funds. Amidst ongoing bankruptcy proceedings and disputes with banking partners, the company’s operational failures have left many struggling to meet basic financial needs. The appointment of a Chapter 11 trustee aims to address these issues, yet the timeline for restoring access to customer funds remains uncertain.
As the situation evolves, affected parties should stay informed and consider reaching out to regulatory bodies like the FDIC and the CFPB for assistance and to voice concerns about fintech regulations. This case highlights the vulnerabilities in fintech operations and the critical need for robust regulatory oversight to protect consumers.
