Tens of thousands of U.S. business and consumer bank accounts were frozen after the sudden closure and bankruptcy of Synapse, a financial technology company that acts 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 Synapse shutdown “prevented us from verifying transactions, checking end user balances and complying with applicable law, and put end users at unnecessary risk,” Memphis-based Evolve said in a statement last week. Because Evolve is a bank and must comply with banking law, we need to ensure that every penny of every customer deposit is processed, which can take time.
Evolve also stressed that it is well capitalized despite the freezing of customer deposits.A person 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 on the record.
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 gives prizes to customers who save money.Reddit message boards for Evolve, Synapse and Yotta were filled with customers complaining about not being able to access their funds.
The scale of Synapse's disruption could be much larger: In court documents, Synapse estimated that it had relationships with about 100 clients before the bankruptcy filing, exposing about 10 million Americans to its services, 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 are asking the court to change the bankruptcy case to Chapter 7 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 that bank as a repository for customer funds, without necessarily being a bank themselves.
Such operations often require an intermediary between the fintech company and the bank that can handle the bookkeeping so that the fintech company can accurately deposit and withdraw money from customer accounts. That's what his Silicon Valley-backed Synapse was doing.
It's unclear what role U.S. banking regulators will play in the chaos created by Synapse's failure. Because Synapse is not a bank, it is not regulated by the Federal Reserve Board or the Federal Deposit Insurance Corporation. None of the banks Synapse worked with have failed, so they are not eligible for FDIC deposit insurance payments.
The Consumer Financial Protection Bureau, which has law enforcement authority, could open an investigation into Synapse's conduct and its impact on customers.
Traditional bankers and consumer advocates 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 chaotic outage and its impact on end users likely confirms policymakers' and regulators' worst fears about the operating model and fintech in general,” wrote Jason Mikula, a former Goldman Sachs banker and current author of the study on Synapse.
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 when a botched software update caused RushCard's systems to freeze completely. RushCard's customers, many of whom are 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.
