Federal bank regulators will not be intervening to assist the thousands of fintech customers who have lost access to their funds due to the bankruptcy of Synapse Financial Technologies, leaving many at risk. In a five-hour hearing before U.S. Bankruptcy Court Judge Martin R. Barash, the lack of regulatory protection for customers was highlighted. Customers of fintechs Yotta Technologies, Juno Finance, and Copper Banking have been unable to access their funds since May 11th due to a dispute between bankrupt Synapse and its bank partner, Evolve Bank & Trust.
Assistant U.S. Attorney Elan Levey stated that federal banking regulators cannot intervene in the situation, as FDIC insurance coverage is only available in the event of a bank failure. While Evolve Bank & Trust is state-chartered and under the Federal Reserve’s regulatory purview, the Fed does not regulate fintech companies or mediate disputes among commercial entities. However, the Fed is actively monitoring the situation to ensure compliance with legal requirements.
Customers affected by the fund freeze expressed frustration and desperation during the bankruptcy hearing, urging the FDIC to step in and cover their accounts with insurance. Reports surfaced of a bank run speculation at Evolve by Synapse CEO Sankaet Pathak, which was denied by Evolve’s lawyer, who reassured the bank’s capital position. Synapse acts as an intermediary for fintechs to offer bank-like services, with 100 fintech clients and 10 million customers at the start of the year.
Synapse’s Chapter 11 debtor-in-possession bankruptcy has led to a financial crisis within the company, with employees not being paid and customer funds being inaccessible. An emergency motion was filed by the U.S. Trustee to convert the bankruptcy to Chapter 7 liquidation or appoint a Chapter 11 trustee to oversee operations. However, the ruling was postponed to next Friday pending further discussions between Synapse’s current management, potential purchasers, and stakeholders.
Desperate to avoid further disruption, some fintech clients have offered to gift money to Synapse to pay employees and maintain operations. Despite ongoing disputes between Synapse and Evolve, Judge Barash ordered them to meet and confer by Monday to restore consumer access to their funds. A private mediator will be hired to facilitate discussions, with other bank partners invited to attend. The situation remains complex and unresolved, leaving thousands of customers in financial limbo.
