Federal Bank Regulators Won’t Save Fintech Customers Caught in Synapse Bankruptcy

Federal banking regulators are not coming to the rescue of the thousands of fintech customers who lost access to their money in the bankruptcy of banking-as-a-service provider Synapse Financial Technologies, nor the millions of others who are in hazard.

That’s the sad news announced today during a five-hour hearing before U.S. Bankruptcy Court Judge Martin R. Barash of the Central District of California. Earlier this week, he urged federal regulators to intervene to protect “ordinary people” and avoid “potential disaster.”

The most immediate cause of pain for individual consumers is a dispute between bankrupt Synapse and one of its partner banks, Arkansas-based Evolve Bank & Trust. This disagreement has prevented customers of fintechs Yotta Technologies, Juno Finance and Copper Banking from accessing money in their accounts or using credit and debit cards linked to them since May 11.

But Assistant U.S. Attorney Elan Levey, representing the U.S. Trustee (the branch of the Justice Department that can intervene in bankruptcy cases), said she had investigated Barash’s idea and that the Federal banking regulators could not intervene. “My understanding is that FDIC insurance coverage is only available in the event of a bank failure,” she said.

Although, as a state-chartered bank, Evolve falls under the regulatory jurisdiction of the Federal Reserve, the Fed, Levey noted, “does not supervise or regulate financial technology companies such as Debtor, and does not nor does it act as a mediator or have the authority to mediate in disputes between business companies. entities. The Fed, however, said in a statement that Levey read to the court that it was “actively monitoring this situation and will help ensure that Evolve complies with all legal requirements related to the debtor’s accounts at Evolve, including all laws applicable to consumer protection and rightly gives priority to this issue.

That brought little comfort to customers who were cut off from their accounts and spoke at the bankruptcy hearing. Yotta client Patrick Ryan directed comments to the FDIC. “I can’t believe the FDIC is here and saying there’s absolutely nothing they can do,” he said. “With all the people that are at stake here, the FDIC needs to step in and just cover these accounts and come up with their insurance.”

Another client gave the court a first-hand account of the impact of freezing funds. “I’m a single mom. I just bought my first house, my first mortgage payment is due in a few days. I’m terrified. Why are they pointing fingers at each other? she said. “I just want to know when I can pay my mortgage That’s the only question I ask anyone involved in this situation.

Colin Tindall, a Juno Finance client with more than $50,000 stuck on the platform, submitted to court a report from Fintech Business Weekly quoting Synapse CEO Sankaet Pathak speculating about a bank run at Evolve during a meeting internal to the company. “Right now, Evolve has completely closed off all access, and I think we all know why, because there’s a deficit and they know that as soon as they open access, there’s going to be a bank run that’s going to happen,” Pathak was quoted as saying.

In response to the speculation, Evolve attorney Caroline Stapleton, a partner at Orrick, Herrington & Sutcliffe in Washington, directed Tindall to the bank’s call reports for reassurance about Evolve’s capital situation. “There is no capital problem in this bank,” she stressed.

The Synapse platform is an intermediary that allows fintechs – which are not themselves banks – to provide banking and similar services such as checking accounts, credit and debit cards and, in some cases, bank accounts. savings insured by the FDIC. According to Synapse, at the start of the year it had 100 fintech clients with around 10 million customers.

Since filing for Chapter 11 debtor-in-possession bankruptcy late last month, Synapse has virtually no money left to pay its employees. Before the court Friday was an emergency motion from the United States Trustee to convert the bankruptcy to a Chapter 7 liquidation under the control of his office. Alternatively, the motion requested that if the case was not converted, a Chapter 11 administrator be appointed to oversee operations in place of Synapse’s current management. “The debtor has seriously mismanaged the estate and there is a substantial and continuing loss or diminution of the estate and a lack of reasonable likelihood of reorganization,” the motion states.

But Barash postponed his decision on the motion until next Friday after Synapse attorney Ron Bender, of Levene, Neale, Bender, Yoo & Golubchik in Los Angeles, argued in favor of giving current management more time to resolve issues preventing fintech customers from accessing. their money. He added that Synapse receives inquiries from potential buyers and that current management is best suited to lead those discussions. “A Chapter 11 trustee would have a very difficult time understanding anything in this case,” Bender said. “If current management resigned, a Chapter 11 trustee would be completely lost.”

Meanwhile, some Synapse fintech clients – desperate to avoid a messy shutdown that could deprive their own customers of their money – have offered to give Synapse money to pay its employees. “These customers are simply sending money, effectively giving it away, to minimize disruption,” Bender said. Lawyers for secured creditors TriplePoint Capital and First Citizens Bank did not object to the offered funds being used to pay employees and maintain operations.

The hearing did not end the dispute that led Evolve to block customers’ access to funds, after it said Synapse cut off its access to a dashboard needed by the bank to carry out security checks. compliance and determine how much money each fintech client actually has. in shared accounts held for their benefit. Synapse says access was restored last Monday, but Evolve insists it still doesn’t have what it needs.

Barash did what he could to force a resolution. He ordered Synapse to provide settlement and general ledger reports that Christopher Staab, Evolve’s chief technology officer, said the bank had not received. He also ordered members of the management and technical teams of Evolve and Synapse to meet and consult by Monday to discuss how to restore consumer access to their funds. The parties agreed to use a private mediator. Synapse’s other partner banks, including Lineage Bank, AMG Bank and American Bank, are allowed, but not required, to attend the meeting, Barash said.