The recent bankruptcy of Synapse, a fintech middleman, has revealed a staggering $85 million shortfall between what partner banks are holding and what depositors are owed. Trustee Jelena McWilliams, appointed by the court, disclosed that customers of fintech firms using Synapse had $265 million in balances, while the banks only had $180 million associated with those accounts. This financial gap has become the epicenter of the most severe meltdown in the U.S. fintech sector since the aftermath of the 2008 financial crisis.
The Dispute Over User Balances
As more than 100,000 customers from a variety of fintech companies found themselves locked out of their savings accounts following Synapse’s collapse, disputes arose regarding user balances. The debacle intensified as Synapse and its partners, such as Evolve Bank & Trust, traded accusations of improper balance transfers and inaccurate ledgers in court filings. McWilliams’ report marks the first attempt from an external party to quantify the extent of the missing funds amid the chaos.
The Hunt for Missing Funds
Since assuming her role as trustee on May 24, McWilliams has collaborated with four banks – Evolve, American Bank, AMG National Trust, and Lineage Bank – to reconcile their conflicting ledgers and facilitate customers’ access to their funds. However, the banks require additional information, particularly concerning Synapse’s brokerage and lending activities, to finalize the process. McWilliams highlighted Synapse’s practice of mingling funds across multiple banks that serviced the same companies, further complicating the investigation.
Despite ongoing efforts, the origin of the shortfall and the whereabouts of the missing funds remain shrouded in mystery. McWilliams emphasized in her report that it is unclear whether end-user funds or negative balance accounts were transferred among partner banks, contributing to fluctuations in the shortfalls across different institutions. The lack of clarity surrounding fund movements has impeded the resolution of the crisis, especially as external forensic firms and former Synapse employees are unavailable due to financial constraints.
McWilliams acknowledged that customers with demand deposit accounts have begun regaining access to their funds, albeit gradually. Conversely, those with funds pooled in ‘for benefit of’ (FBO) accounts face greater challenges in retrieving their money. A comprehensive reconciliation process is projected to stretch over several weeks before all customers can access their funds seamlessly. In her report, McWilliams proposed various solutions for Judge Martin Barash to consider during an upcoming hearing, aimed at enabling FBO customers to recover their funds promptly.
A Call to Action
As Friday’s status conference approaches, McWilliams recommended prioritizing the distribution of funds to end-users without delay. Options such as paying out some customers in full while deferring payments to others based on the status of their FBO accounts were suggested. Alternatively, distributing the shortfall equitably among all customers to expedite the availability of limited funds emerged as a plausible strategy. The outcome of the hearing will not only shape the path to recovery for affected customers but also shed light on the intricacies of the Synapse bankruptcy debacle.
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