The fintech sector is in turmoil due to an $85 million shortfall between customer deposits and what partner banks of fintech middleman Synapse are holding, as outlined by the court-appointed trustee, Jelena McWilliams. This revelation sheds light on the significant challenges faced by over 100,000 customers of various fintech companies who have been unable to access their savings accounts following Synapse’s failure. Accusations have been exchanged between Synapse and its partner banks, including Evolve Bank & Trust, regarding improperly moving balances or maintaining inaccurate ledgers. This situation marks the most severe crisis in the U.S. fintech sector since its establishment post the 2008 financial crisis.
Since McWilliams took on the role of trustee on May 24, she has been working with four banks to reconcile their disparate ledgers in order to restore customer access to funds. However, the complexity of the situation has been exacerbated by the lack of information regarding Synapse’s brokerage and lending operations, which may have influenced fund movements among multiple institutions. The whereabouts of the missing funds remain unknown, as it is unclear whether end-user funds and negative balance accounts were transferred among partner banks in a manner that either increased or decreased the existing shortfalls at each bank. This lack of clarity has hindered efforts to address the crisis effectively.
McWilliams faces additional challenges due to the unavailability of funds to enlist external forensic firms or former Synapse employees for assistance, as the company terminated its staff on May 24. Some customers with funds held in demand deposit accounts have started regaining access to their accounts, although those whose funds were combined in FBO (For Benefit Of) accounts will encounter delays in accessing their money. McWilliams anticipates that a full reconciliation of FBO accounts will take several more weeks to complete. In her report, she presented various options to Judge Martin Barash to enable certain FBO customers to recover their funds promptly, including complete payouts to some customers while deferring payments to others based on the status of individual FBO accounts.
The options also encompass spreading the shortfall evenly among all customers to expedite the availability of limited funds. McWilliams recommended that funds should be distributed to end-users as promptly as possible following the status conference with Judge Barash. The ongoing efforts to address the fallout from Synapse’s bankruptcy underscore the critical need to elucidate the circumstances surrounding the missing funds and facilitate the swift restoration of customer access to their accounts. The resolution of this crisis will require collaboration among all parties involved, including the trustee, partner banks, and regulators, to ensure a fair and transparent recovery process for affected customers. As the investigation continues, the fintech industry faces a pivotal moment to reassess its operational and regulatory frameworks to prevent a similar catastrophe in the future.
