Current:Home > ScamsAbrupt shutdown of financial middleman Synapse has frozen thousands of Americans’ deposits-LoTradeCoin
Abrupt shutdown of financial middleman Synapse has frozen thousands of Americans’ deposits
View Date:2024-12-23 17:09:34
NEW YORK (AP) — The bank accounts of tens of thousands of U.S. businesses and consumers have been frozen in the aftermath of the abrupt shutdown and bankruptcy of financial technology company Synapse, which acts as a middleman between financial technology companies and banks.
Synapse filed for Chapter 11 bankruptcy protection in April and has shut down its services to some of its fintech or bank partners, including Evolve Bank & Trust. That has caused disruptions for customers of Synapse’s partners, leading to accounts being frozen or showing funds not existing at all.
Synapse’s shutdown has “needlessly jeopardized end users by hindering our ability to verify transactions, confirm end user balances, and comply with applicable law,” said Memphis-based Evolve in a statement last week. Because Evolve is a bank and is required to comply with banking laws, it has to make sure all customer deposits are accounted for to the penny, which may take time.
Evolve also stressed that, despite customers’ deposits being frozen, it is well capitalized. A source who is familiar with the size and scope of the number of accounts impacted at Evolve estimated the number of frozen accounts to be under 200,000. The person was not authorized to speak on the record.
Other banks or fintech companies that San Francisco-based Synapse partnered with included Tennessee-based Lineage Bank, as well as savings rewards company Yotta, a company that gives prizes to customers who save money. Reddit message boards for Evolve, Synapse and Yotta were full of customers complaining about being unable to access their funds.
The scale of Synapse’s disruptions could widen. Synapse, in court documents, estimates that before it filed for bankruptcy it had roughly 100 customer relationships that exposed roughly 10 million Americans to their services. However, banking regulators believe that figure is extremely high and the number of impacted Americans will be thousands or tens of thousands.
Synapse’s creditors have been pushing in court to convert the bankruptcy to Chapter 7, which would liquidate the company. In court, representatives for Synapse’s customers argued that liquidation could make the disruptions to customers’ funds even worse.
Fintech companies, more often than not, are not banks themselves due to the high cost and paperwork necessary to create a new bank. Instead these companies partner with banks — many of them smaller institutions with a minimal national profile — and use that bank as a place to store customer funds without having to be a bank themselves.
In order to operate this way, fintech companies often need a middleman between the fintech company and the bank that can do the bookkeeping necessary to make sure customer accounts are credited and debited correctly. That’s the job Silicon Valley-backed Synapse had.
It’s not clear what role U.S. banking regulators can play in the chaos resulting from Synapse’s collapse. Synapse isn’t a bank, so its regulation is not handled by the Federal Reserve or the Federal Deposit Insurance Corporation. Because none of the banks that Synapse has worked with have failed, there is no eligibility for FDIC deposit insurance to be paid out.
It is possible the Consumer Financial Protection Bureau, which has law enforcement authority, could open an investigation into Synapse’s behavior and its impact on customers.
Traditional bankers as well as consumer advocates have long criticized the fintech business model, where these companies appear to be banks but have none of the protections of banks due to customer funds being stored elsewhere.
“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,” wrote Jason Mikula, a former Goldman Sachs banker who has been writing about the problems at Synapse.
This is not the first time a problem with a financial middleman has caused pain to average Americans.
In 2015, hundreds of thousands of customers of the prepaid debit card company RushCard were frozen out of their funds after a botched software update cause RushCard’s systems to be completely frozen. Customers of RushCard, often low-income people, were unable to buy groceries or other basic necessities. The company was fined $13 million buy the Consumer Financial Protection Bureau for the dayslong disruption.
veryGood! (7)
Related
- 'Survivor' 47, Episode 9: Jeff Probst gave players another shocking twist. Who went home?
- Masatoshi Ito, who brought 7-Eleven convenience stores to Japan, has died
- First Republic becomes the latest bank to be rescued, this time by its rivals
- Biden reassures bank customers and says the failed firms' leaders are fired
- ‘I got my life back.’ Veterans with PTSD making progress thanks to service dog program
- Racial bias in home appraising prompts changes in the industry
- Step up Your Skincare and Get $141 Worth of Peter Thomas Roth Face Masks for Just $48
- The Fed already had a tough inflation fight. Now, it must deal with banks collapsing
- 12 college students charged with hate crimes after assault in Maryland
- Officer who put woman in police car hit by train didn’t know it was on the tracks, defense says
Ranking
- Will Mike Tyson vs. Jake Paul end in KO? Boxers handle question differently
- Startups 'on pins and needles' until their funds clear from Silicon Valley Bank
- Retired Georgia minister charged with murder in 1975 slaying of girl, 8, in Pennsylvania
- Cardi B Calls Out Offset's Stupid Cheating Allegations
- Bull doge! Dogecoin soars as Trump announces a government efficiency group nicknamed DOGE
- There were 100 recalls of children's products last year — the most since 2013
- The job market slowed last month, but it's still too hot to ease inflation fears
- Lawmakers are split on how to respond to the recent bank failures
Recommendation
-
Georgia's humbling loss to Mississippi leads college football winners and losers for Week 11
-
You're Going to Want All of These Secrets About The Notebook Forever, Everyday
-
How Everything Turned Around for Christina Hall
-
Judge to decide in April whether to delay prison for Theranos founder Elizabeth Holmes
-
DWTS' Gleb Savchenko Shares Why He Ended Brooks Nader Romance Through Text Message
-
Ray J Calls Out “Fly Guys” Who Slid Into Wife Princess Love’s DMs During Their Breakup
-
What is the DMZ? Map and pictures show the demilitarized zone Travis King crossed into North Korea
-
Stranger Things' Noah Schnapp Shares Glimpse Inside His First Pride Celebration