Fintech
Federal banking regulators won’t bail out Fintech customers caught up in Synapse’s bankruptcy
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Federal banking regulators will not intervene to save the thousands of fintech customers who have lost access to their money due to the banking service provider’s ongoing bankruptcy Synapse financial technologies or the other millions of people at risk.
That was the sad news delivered today in a five-hour hearing before U.S. Bankruptcy Court Judge Martin R. Barash of the Central District of California. Earlier this week, he reportedly did federal regulators urged intervene to protect “ordinary people” and avoid a “potential disaster”.
The most immediate cause of pain for individual consumers is a dispute between bankrupt Synapse and one of its banking partners, Arkansas-based Evolve Bank & Trust. This disagreement has left fintech clients Yotta Technologies, Juno Finance and Copper banking unable to access the money in their accounts or use the credit and debit cards linked to them since May 11.
But Assistant U.S. Attorney Elan Levey, who represents the U.S. Trustee (the arm of the Justice Department involved in bankruptcy cases), said he had investigated Barash’s idea and that federal banking regulators could not intervene. “I understand that FDIC insurance coverage is only available in the event of a bank failure,” he said.
While Evolve, as a state bank, falls under the Federal Reserve’s regulatory purview, the Fed, Levey noted, “does not supervise or regulate fintech companies like the debtor, nor mediate or have the authority to mediate disputes between trading companies “. entity.” The Fed, however, said in a statement that Levey read to the court that it “is actively monitoring this situation and will help ensure that Evolve complies with all legal requirements relating to the borrower’s accounts at Evolve, including any applicable securities laws consumer protection and is appropriately prioritizing this issue.”
That provided little comfort to customers who were cut off from their accounts and spoke out during bankruptcy hearings. Yotta customer Patrick Ryan directed his comments to the FDIC. “I can’t believe the FDIC stands here and says there’s absolutely nothing they can do,” he said. “With all the people that are at stake here, the FDIC needs to step up and simply cover these accounts and offer its insurance.”
Another client gave the court a first-hand account of the impact the freezing of funds is having. “I’m a single mom. I just bought my first home, the 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’ll be able to pay my mortgage. That’s the only question I have for anyone involved in this situation.”
Colin Tindall, a Juno Finance customer with more than $50,000 locked up on the platform, filed a report with the court. Fintech financial weekly citing Synapse CEO Sankaet Pathak speculating about a bank run at Evolve during an internal meeting at the company. “Right now, Evolve has completely shut down all access, and I think we all know why, because there’s a deficit and they know that as soon as they turn on access, there’s going to be a bank run,” Pathak said.
In response to the speculation, Evolve lawyer Caroline Stapleton, a partner at Orrick, Herrington & Sutcliffe in Washington, directed Tindall to the bank’s call reports for reassurance about Evolve’s capital position. “There is no question of capital 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 FDIC-insured savings accounts. According to Synapse, it had 100 fintech customers with around 10 million customers at the start of the year.
Since filing for Chapter 11 debtor-in-possession bankruptcy late last month, Synapse has essentially run out of money to pay its employees. Before the court Friday was an emergency motion by the United States Trustee to convert the bankruptcy to a Chapter 7 liquidation under the control of their office. Alternatively, the motion asked that, if the case was not converted, a Chapter 11 trustee be appointed to oversee operations instead of Synapse’s current management. “The debtor has grossly mismanaged the assets and there is a substantial and continuing loss or diminution of the assets and the absence of a reasonable likelihood of reorganization,” the motion states.
But Barash postponed a decision on the motion until next Friday, after Synapse bankruptcy attorney Ron Bender, of the firm Levene, Neale, Bender, Yoo & Golubchik in Los Angeles, argued in favor of giving the current management more time to address the problems that prevent fintech customers from accessing their money. He added that Synapse is receiving inquiries from potential buyers and that current management is best placed to address such discussions. “A Chapter 11 trustee would have a hard time trying to figure anything out in this case,” Bender said. “If the current management leaves, a Chapter 11 trustee would be completely lost.”
Meanwhile, some of Synapse’s fintech clients – desperate to avoid a messy shutdown that could leave their customers cut off from their money – have offered to give Synapse money to pay employees. “These customers simply send money, effectively giving it away, to minimize inconvenience,” Bender said. Lawyers for secured creditors TriplePoint Capital and First Citizens Bank did not object to using the donated funds to pay employees and maintain operations.
The hearing has not concluded the controversy This led Evolve to block customer access to funds, after Synapse apparently cut off access to a dashboard needed for the bank to run compliance checks and determine how much money each individual fintech customer actually has in their accounts grouped managed for their own 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 ledger reports that Christopher Staab, Evolve’s chief technology officer, testified the bank had not received. He also directed executive and technical team members from Evolve and Synapse to meet and confer by Monday to discuss how to restore consumers’ access to their funds. The parties agreed to hire a private mediator. Synapse’s other banking partners, including Lineage Bank, AMG Bank and American Bank, are permitted, but not required, to participate in the meeting, Barash said.