The sudden bankruptcy and closure of financial technology company Synapse, which serves as a middleman between banks and financial technology companies, has resulted in the freezing of bank accounts belonging to tens of thousands of American consumers and businesses.
In April, Synapse filed for Chapter 11 bankruptcy protection. As a result, it stopped providing services to certain banks or fintech partners, such as Evolve Bank & Trust.
Customers of Synapse’s partners have experienced interruptions as a result, with accounts being suspended or showing no funds at all.
Memphis-based Evolve said in a statement last week that Synapse’s closure had “needlessly jeopardized end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law.”
Since Evolve is a bank and must go by banking regulations, it must ensure that every customer’s deposit is tracked down to the last penny, which could take some time.
Evolve emphasized that the company is properly capitalized even while customer deposits are halted. Less than 200,000 accounts were blocked, according to a source with knowledge of the extent and breadth of the affected accounts at Evolve.
Laptops 1000San Francisco-based Synapse has worked with other banks and fintech companies, such as Yotta, a savings incentives startup that awards prizes to consumers who save money, and Tennessee-based Lineage Bank. Many clients of Yotta, Synapse, and Evolve complained on Reddit about not being able to access their cash.
The extent of Synapse’s disturbances may increase. According to Synapse’s estimations in court records, before declaring bankruptcy, it had about 100 customer relationships, exposing nearly 10 million Americans to its offerings.
Banking officials, however, think the number is astronomically large and that hundreds or tens of thousands of Americans will be affected.
The creditors of Synapse have been requesting in court to change the bankruptcy to Chapter 7, which would result in the company’s liquidation. Customers’ advocates contended in court that Synapse’s liquidation might worsen the disruptions to their funds.
Because starting a new bank requires a lot of money and paperwork, fintech startups are rarely banks. Rather than operating as banks themselves, these organizations collaborate with banks, many of which are smaller establishments with a limited national reach, to utilize the bank as a repository for client cash.
Fintech businesses frequently require a middleman to handle the bookkeeping required to ensure that customer accounts are accurately credited and debited to function in this manner. That was the responsibility of Silicon Valley-backed Synapse.
What part American financial regulators may play in the pandemonium that followed Synapse’s failure is unclear. Since Synapse is not a bank, neither the Federal Reserve nor the Federal Deposit Insurance Corporation are in charge of regulating it.
Synapse is not eligible for FDIC deposit protection to be paid out because none of the banks it has worked with have collapsed.
The Consumer Financial Protection Bureau, a law enforcement agency, might launch an inquiry into Synapse’s actions and how they affect its clients.
Both traditional bankers and consumer activists have long criticized the fintech business model. Although these companies seem like banks, their customer cash is housed elsewhere, so the same laws do not protect them.
Former Goldman Sachs banker Jason Mikula, who has been blogging about the issues at Synapse, commented, “The disorderly failure of Synapse and the impact on end users is likely to confirm policymakers’ and regulators’ worst fears about the operating model and fintech in general.
Laptops 1000The typical American has suffered before due to issues with financial intermediaries. This is not the first instance of this.
2015 saw the entire freezing of RushCard’s systems due to a poorly executed software update, depriving hundreds of thousands of the prepaid debit card company’s users of their money. RushCard users, who were frequently low-income individuals, were unable to purchase food or other essentials.
The Consumer Financial Protection Bureau fined the corporation $13 million for the disruption that lasted for many days.
