Fintech
Making sense of for-benefit accounts (FBO) and the future of Fintech
The recent Synapse failure represents one of the largest implosions in the history of the FinTech sector.
The ongoing chaos on the Banking-as-a-Service (BaaS) platform has affected over one hundred thousand US end users, including other FinTech activitiesand investigations into its fallout have uncovered an estimate $85 million shortfall between what Synapse depositors are entitled to and what the bankrupt FinTech’s accounts show.
According to a Thursday (June 13) relationship by the Chapter 11 Trustee, former and current FDIC Chairman Cravath, Swaine and Moore company Jelena McWilliams“At the time of writing, the Trustee has been advised by at least one partner bank that there is an approximate deficit of $65 – $96 million based on progress made to date in reconciliation.”
While there are still no definitive answers as to what happened to the tens of millions of dollars in missing funds, during a precedent creditor hearingformer CEO of Synapse Sankaet Pathak told the court that Synapse may have commingled end-user funds, operating and reserve funds from FinTech programs, and Synapse’s own operating funds in the FBO accounts.
These types of accounts allow banks and FinTechs to collaborate to provide customers access to advanced banking features without compromising security or privacy standards.
“For Benefit Of” or “FBO” accounts could be crucial both to understanding where the money at the center of the Synapse collapse disappeared and how to redistribute it once found.
to know more: Synapse’s collapse provides harsh lessons for its B2B partners
Synapse’s potentially shuffled funds to the Collapse Recovery Center
FBO accounts, which are custodial money pools that allow FinTech companies to manage funds on behalf of their users without taking legal ownership of the account, are a key component of the BaaS industry’s regulatory compliance programs.
Because they enable FinTech companies to manage customer funds while complying with legal requirements, FBO accounts are critical to the operational integrity, regulatory compliance and customer trust that underpin the fintech industry.
Chapter 11 trustee McWilliams’ top priority is to restore end-user access to their funds by untangling the inner workings of Synapse’s proprietary accounting system. It promises to be a difficult task, due to the alleged mixing of funds into FBO accounts.
In essence, the problem is that without Synapse’s cooperation in establishing access to the information it controls, money held in FBO accounts under Synapse’s name cannot be returned to the beneficiary end users of those accounts.
As a result, other FinTech customers are suffering. Like PIMNTI reportedaround 85,000 FinTech startups Yottacustomers of – who held a total of $112 million in savings – were locked out of their accounts, in just one example of the ripple effect of Synapse’s collapse, while Copperanother FinTech that used Synapse announced it will shut down at least some of its offerings, including bank deposit accounts and debit cards.
to know more: FDIC warnings and “fake” deposit insurance claims highlight non-bank risks
Changing compliance needs in the digital banking age
According to Thursday’s report, Synapse’s trustee “has begun to learn from partner banks, fintech partners and other stakeholders about challenges in the reconciliation process precipitated by Synapse’s bankruptcy and abrupt liquidation. The Trustee was made aware of situations where partner banks lost access to Synapse systems, had reason to believe there were inaccuracies in Synapse’s ledger, and identified unexpected deficiencies in FBO accounts held by them. At the time of the trustee’s appointment, the partner banks did not have open lines of communication or protection mechanisms in place to facilitate data sharing between them.”
“In hindsight it’s very clear that Synapse was not running on his duty to reconcile the dollars,” Amias Geretia partner at QED Investorstold PYMNTS in an interview published Monday (June 17), noting that many other companies make sure that each FinTech that works with a bank has a FBO account dedicated to that FinTech with that bank, meaning there is no possibility of commingling of funds.
The importance of BaaS best practices comes against the backdrop of approximately two-thirds of banks and credit unions having entered into at least one FinTech partnership in the past three years, with 76% of banks deeming FinTech partnerships necessary to meet expectations of customers, second PYMNTS Intelligence.
In terms of some sort of resolution, like a status report filed on June 6, Synapse Brokerage’s FBO funds could be funneled into a single account and the trustee/court would determine what would be paid to each end user. General Synapse FBO accounts held elsewhere may result in partial payments or payments to FBO accounts that can be fully reconciled, or perhaps there may be no payments until each individual account is finally reconciled.
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