Fintech
The closure of the fintech intermediary Synapse freezes thousands of American deposits
NEW YORK — The bank accounts of tens of thousands of U.S. businesses and consumers have been frozen following the sudden closure and bankruptcy of financial technology company Synapse, which serves as an intermediary between financial technology companies and banks.
Synapse filed for Chapter 11 bankruptcy protection in April and has terminated its services to some of its fintech or banking partners, including Evolve Bank & Trust. This has caused inconvenience to customers of Synapse partners, leading to accounts being frozen or non-existent funds being displayed.
Synapse’s shutdown has “unnecessarily jeopardized end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law,” Memphis-based Evolve said in a statement last week . Since Evolve is a bank and is required to comply with banking laws, it must ensure that all customer deposits are accounted for to the cent, which may take some time.
Evolve also highlighted that although customer deposits are frozen, they are well capitalized. A source familiar with the size and scope of the number of accounts affected by Evolve estimated the number of frozen accounts to be less than 200,000. The person was not authorized to speak on the record.
Other banks or fintech companies that Synapse has partnered with include Tennessee-based Lineage Bank, as well as savings rewards company Yotta, a company that offers rewards to customers who save money. Reddit message boards for Evolve, Synapse, and Yotta were full of customers complaining about not being able to access their funds.
The scope of Synapse outages may widen. Synapse, in court documents, estimates that before filing for bankruptcy it had about 100 customer relationships that exposed about 10 million Americans to their services. However, banking regulators believe the figure is extremely high and that the number of Americans affected will be in the thousands or tens of thousands.
Synapse’s creditors have pushed in court to convert the bankruptcy to Chapter 7, which would liquidate the company. In court, Synapse customer representatives argued that the liquidation could further worsen disruptions to customer funds.
Fintech companies, in most cases, are not themselves banks due to the high costs and paperwork involved in setting up a new bank. These companies instead partner with banks – many of them smaller institutions with minimal national profiles – and use that bank as a place to deposit customer funds without having to be a bank themselves.
To operate in this way, fintech companies often need an intermediary between the fintech company and the bank who can carry out the necessary accounting to ensure that customer accounts are credited and debited correctly. This is the work done by Silicon Valley-backed Synapse.
It’s unclear what role U.S. banking regulators may play in the chaos resulting from Synapse’s collapse. Synapse is not a bank, so its regulation is not handled by the Federal Reserve or the Federal Deposit Insurance Corporation. Since none of the banks that Synapse has partnered with have failed, there is no eligibility for FDIC deposit insurance payments.
It’s possible that the Consumer Financial Protection Bureau, which has enforcement authority, could open an investigation into Synapse’s behavior and its impact on customers.
Traditional bankers and consumer advocates have long criticized the fintech business model, in which these companies appear to be banks but have none of the protections of banks due to customer funds being stored elsewhere.
“Synapse’s messy failure and the impact on end users will likely confirm policymakers’ and regulators’ worst fears about the operating model and fintech in general,” wrote Jason Mikula, a former Goldman Sachs banker who has written about the problems of Synapses.
This isn’t the first time a problem with a financial intermediary has caused suffering for the average American.
In 2015, hundreds of thousands of customers of prepaid debit card company RushCard were left without funds after a failed software update caused RushCard’s systems to crash completely. RushCard customers, often low-income people, have been unable to purchase groceries or other basic necessities. The company was fined $13 million by the Consumer Financial Protection Bureau for the day-long outage.