Tens of thousands of bank accounts of U.S. businesses and consumers have been frozen following the sudden closure and bankruptcy of Synapse, a financial technology company that acted as an intermediary between financial technology companies and banks.
Synapse filed for Chapter 11 bankruptcy protection in April and suspended services to some of its fintech and banking partners, including Evolve Bank & Trust. This caused confusion for customers of Synapse’s partners, who saw their accounts frozen or shown as not having funds.
The Memphis-based company said shutting down Synapse “impeded our ability to verify transactions, verify end user balances and comply with applicable law, and unnecessarily put end users at risk.” Evolution from last week’s statementBecause Evolve is a bank and must comply with banking laws, it needs to ensure that all customer deposits are recorded to the last penny, which can take time.
Evolve also stressed that it remains well capitalized despite the freezing of customer deposits. A source familiar with the size and scope of the number of affected accounts at Evolve estimated the number of frozen accounts to be fewer than 200,000. The person was not authorized to speak publicly.
Other banks and fintech companies that San Francisco-based Synapse has partnered with include Tennessee-based Lineage Bank and Yotta, a savings rewards company that offers prizes to customers who save. Reddit message boards for Evolve, Synapse and Yotta were filled with customers complaining they couldn’t access their funds.
The scale of Synapse’s disruption could be greater: Synapse estimated in court documents that it had roughly 100 customer relationships and that roughly 10 million Americans used its services before filing for bankruptcy. But banking regulators believe that figure is significantly higher and that the number of affected Americans could be in the thousands or tens of thousands.
Synapse’s creditors have asked the court to change the bankruptcy to Chapter 7 bankruptcy and liquidate the company. In court, representatives of Synapse’s customers argued that liquidation could cause further disruption to customers’ funds.
Fintech companies are often not banks themselves, due to the high costs and paperwork required to set up a new bank. Instead, these companies partner with banks (many of which are small institutions with little national recognition) and use those banks as custodians of customer funds, but are not banks themselves.
To operate like this, you often need an intermediary between the fintechs and the banks who can handle the bookkeeping to ensure the fintechs deposit and withdraw funds accurately into customer accounts – a job that Silicon Valley-backed Synapse was doing.
It’s not clear what role U.S. banking regulators might play in the chaos caused by Synapse’s collapse. Synapse is not a bank, so it isn’t regulated by the Federal Reserve or the Federal Deposit Insurance Corp. And because none of the banks Synapse has done business with have failed, it isn’t eligible for FDIC deposit insurance.
The Consumer Financial Protection Bureau, which has enforcement powers, could also launch an investigation into Synapse’s practices and how they impacted customers.
Traditional bankers and consumer advocacy groups have long criticized fintech’s business model, in which these companies look like banks but have none of the protections of banks because customer funds are kept elsewhere.
“Synapse’s disorderly failure and its impact on end users will likely confirm the worst fears policymakers and regulators have about the operating model and fintech in general,” they wrote. Jason MikulaA former Goldman Sachs banker, he has written about synaptic issues.
This isn’t the first time problems with financial intermediaries have caused pain for ordinary Americans.
In 2015, hundreds of thousands of customers of prepaid debit card company RushCard had their funds frozen after a botched software update caused RushCard’s systems to freeze completely. RushCard’s customers, many of whom were low-income, were unable to buy groceries and other necessities. The company was fined $13 million by the Consumer Financial Protection Bureau for the days of disruption.