👻 A fintech horror story (part 2) Have we found the funds?
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Hi there,
This is Vieje again, here with an extra special newsletter this week as my wife and I welcomed our son Colin into the world on Tuesday morning. Everyone is healthy, and I couldn’t be more excited to be a father. I’ll be taking some time off, but my wife and baby are having nap time right now and the stars aligned for me to write this timely newsletter this week.
I wanted to write a follow-up on the Synapse bankruptcy impacting several FinTechs. Back in July, I wrote “A FinTech horror story - why are $250M+ in bank deposits locked up?”. Unfortunately, the situation has not been resolved yet, but there has been progress made, and I thought it was a great time to write about the latest. Let’s start with a quick recap from last time.
In summary, neobank startups like Yotta and Juno focus on customer acquisition and partner with chartered banks such as Evolve Bank & Trust to actually hold customer funds and handle regulatory aspects. These arrangements typically work well, because it’s difficult for startup neobanks to get and maintain a banking charter. The partner banks also benefit as they do not have to spend on customer acquisition.
So where does Synapse fit into this? Synapse was a FinTech startup that connected neobank startups with FDIC-sponsored banks. In short, they served as the infrastructure provider and pipeline for neobanks and banks to connect and partner with each other. Neobanks such as Yotta and Juno built their connections to partner banks such as Evolve Bank & Trust through Synapse.
Unfortunately, Synapse went bankrupt in May, which sparked this controversy. End users at neobanks such as Yotta and Juno were unable to withdraw their funds from their accounts. Synapse has pointed the finger at Evolve, saying they have the funds, while Evolve claims the ledgers do not match up, and they do not have the funds.1
Since we last wrote about it, there’s been some progress in sorting out this mess. On October 18th, Evolve’s outside consultant announced that they completed a full reconciliation and claimed to have recreated Synapse’s ledgers.
On November 4th, end users at neobanks using Evolve were able to log in and see what Evolve says the balance is. They have also posted what Synapse is claiming their balance to be. Furthermore, Evolve has set up a process for those end users to get back the funds that Evolve believes are held with them.
Taking a look at the Yotta Subreddit, it was a complete mixed bag of end users who were getting all funds returned, some funds, or no funds at all. Many users posted screenshots of their “Evolve balance” being significantly lower than what Synapse and the neobanks are claiming. Unfortunately, it appears that many are only getting a small fraction of their funds back, at least for now.
The key thing here is that Evolve is claiming to have only some of the end-user funds that Synapse says are with Evolve. If that is true, where did the rest of the cash go?
One key detail that has emerged from the latest court hearings is that in October 2023, Synapse ended its partnership with Evolve2. As part of the unwinding of their partnership, Synapse supposedly moved a lot of funds from end-user demand deposit accounts (DDA) accounts at Evolve back to Synapse For Benefit Of (FBO) accounts.
Let’s dig into this a bit in a simplified format.
A DDA is a single account set up for the account holder(s). When you set up a bank account, a DDA is typically what you are opening. Neobanks such as Yotta told their users that their account opening was a DDA at Evolve.
An FBO account can look similar to a DDA, but one important distinction is that it’s pooled, meaning there’s one account holding many end-user funds. It’s up to that bank/company to maintain who owns what and separate the pooled funds into FBO accounts. It’s important to note that an FBO account is inherently not a bad thing, and many banks do this successfully.
Evolve claims that Synapse moved a bunch of funds from presumably Evolve DDAs into a Synapse FBO account on behalf of the end user.
In theory, this shouldn’t be an issue. Synapse’s partnership ended with Evolve, so they moved End User Customer A’s account at Evolve into End User Customer A's FBO account at another partner bank. Given basic ledger maintenance, this should be a fairly straightforward 1:1 transfer. But that’s where things get weird.
With Evolve’s latest reconciliation, they are claiming that Synapse moved (or never sent) some or all of an individual’s deposited funds. If that is the case, why were only some funds moved? Where did all the funds that supposedly went to Synapse go? Unfortunately, we still have more questions than answers.
Some end-user funds have been returned, which is a positive sign. But there are still thousands of users missing funds. And perhaps the worst part is that we haven’t yet tracked down the location of those missing funds. My hope is that this is a situation of gross negligence rather than fraud, but unfortunately, it’s too early to rule anything out right now.
Hopefully, we’ll have another update sooner rather than later with more answers.
Things we’re digging:
1 Gura, D. (2024, July 2). The collapse of fintech middleman Synapse reveals cracks in FDIC system: Why the fallout may be far-reaching. CNBC. https://www.cnbc.com/2024/07/02/synapse-fintech-fdic-false-promise.html
2 Evolve Bank & Trust. (2024, July 12). Evolve Bank & Trust statement on Synapse bankruptcy. https://www.getevolved.com/about/news/evolve-bank-trust-statement-on-synapse-bankruptcy/