Synapse Bankruptcy: $85 Million Customer Funds Missing, Here's What Went Down

The bank accounts of tens of thousands of US businesses and consumers have been locked out in the aftermath of the abrupt bankruptcy of financial technology company Synapse. The firm, which acted as a middleman between financial technology companies and banks, filed for Chapter 11 bankruptcy protection in April causing complications for its partner businesses and banks including Evolve Bank & Trust.

Synapse Financial Technologies is one of the leading BaaS providers, which had popular banking apps and Alternative Platforms like Yieldstreet, Mainvest, Yotta, Juno, and Copper as clients. Since these fintech companies aren’t traditional banks, Synapse acted as the middleman to connect them with banks in order to provide their services to customers. While Synapse is set to be acquired by TabaPay, its customers are hanging in the balance. 

The Downfall of Synapse

The downfall of Synapse began with a disputes between a partner fintech companies, and banks regarding customer balances. Since last year, the Andreessen Horowitz-backed startup, Synapse had disagreements with several of its partners about how much in customer balances it owed.

The situation deteriorated following a major dispute between Yotta, a savings app and Evolve Bank & Trust. This followed the exodus of several key partners of Synapse, which led to the company declaring bankruptcy. On May 11, Synapse cut off access to a technology system for its partners including Yotta and Evolve Bank & Trust, to process transactions and account information, as per the filings, CNBC reported.

The disruption has affected over one million Americans, many of whom are facing financial distress.

Hundreds of Millions of Dollars in Missing Funds

Synapse’s bankruptcy is now under judicial review where a court appointed trustee in the bankruptcy is reviewing the details. As per the latest hearing, the trustee, Jelena McWilliams, informed the court that there is an $85 million shortfall between what partner banks of Synapse are holding and what depositors are owed.

As per reports, Evolve Bank and Trust, stated it needs ledgers from Synapse to reconcile customer accounts, raising concerns about the accuracy of balances. Customers of fintech firms that used Synapse had $265 million in balances but the banks only held $180 million associated with those accounts, CNBC reported citing information from the court hearing.

Impact on Customers

The impact of Synapse’s bankruptcy and dispute has impacted consumers. There have been Reddit threads revealing the harrowing stories of individuals who are unable to access their money, to pay bills, or cover rent.

The scale of Synapse’s disruptions could widen as before filing for bankruptcy, Synapse had 20 banks and 100 fintech companies/customer relationships that exposed about 10 million Americans to their services, as per the court documents.

Furthermore, McWilliams stated that there are no funds to pay external forensics firms or even former Synapse employees. Synapse had fired the last of its employees on May 24.

Some customers who held demand deposit accounts with the partners have are getting access to their accounts, as per McWilliams.

However, users whose funds were pooled in a communal way known as for benefit of, or FBO, accounts, have a harder time getting their money and a full reconciliation is expected to take weeks.

As for Yotta, its 85,000-strong user base was locked out of their accounts for three weeks with $112 million in inaccessible funds, CEO and co-founder Adam Moelis told CNBC.

What’s Next for Customers?

McWilliams had presented several options for Judge Martin Barash in her report. However, comments from Barash cast doubt on how the options would move forward, as per CNBC.

It isn’t clear what role US banking regulators can play in the matter. Since Synapse isn’t a bank, its regulation is not handled by the Federal Reserve or the Federal Deposit Insurance Corporation (FDIC).