Fuzzy lines between fintechs and banks confuse consumers in Synapse bankruptcy

Customers of several fintech companies that use Synapse Financial Technologies Inc. to connect with a bank partner are reporting that they lost access to their funds in mid-May and are asking who can help.

For reasons that Synapse and its bank partner Evolve Bank & Trust are still disputing at a bankruptcy court in California, fintech partners of Synapse, including Copper, Juno and Yotta Technologies Inc., have been unable to process payments for their end customers. While Evolve claimed it cannot distribute the funds because Synapse shut down the system abruptly without providing necessary records, Synapse claimed that it restored the system on May 13, and Evolve's decision to freeze the funds "has been unnecessary and punitive," according to the companies' statements.

Synapse filed for Chapter 11 bankruptcy protection on April 22, with a reorganization plan under which its assets would be acquired by instant payment company TabaPay Inc. But the deal was called off on May 11, and disruptions appeared to escalate since then.

One of the consumers affected, Nicholas Michaud Jr., said he found on May 16 that the bank account he set up with his teenage daughter on the mobile banking app Copper was closed. He opened the Copper account in October 2023 to let his daughter manage her own savings with guidance and visibility from a parent. Before the account was closed, his daughter has saved $1,730.67 in the Copper app by working a part-time job after school at a local florist shop.

Michaud, a manager at a home care services facility in Bristol, Conn., did not expect to learn jargon like "banking-as-a-service (BaaS)."

"The whole thing is just a mess," Michaud wrote in a message to S&P Global Market Intelligence. "I'm not in the financial world much and had to self-educate myself about the BaaS banking model, etc., just to try and understand what has happened and transpired."

In a letter to customers, Copper CEO Eddie Behringer said the company, whose legal name is Next Financial Advisors LLC, would stop offering banking accounts and debit cards in its current version by May 13 and would instead partner with "trusted large banks." Copper said its middleware provider's decision to shut down service a few days before May 13 forced it to close banking accounts much sooner than anticipated.

The task of reconciling ledgers and returning money to depositors is now led by Jelena McWilliams, who was appointed as trustee by the bankruptcy court on May 24. McWilliams, a partner at Cravath Swaine & Moore LLP, was formerly the chairman of the Federal Deposit Insurance Corp.

According to an account update that Michaud received on May 29, Copper is waiting for the trustee of the bankruptcy case to lift restrictions on its ability to transfer funds. Meanwhile, his daughter's money is being held at AMG National Trust Bank, another Synapse bank partner, and Copper has put information on file to prepare to process payments for Michaud's bank account.

Complaints directed to the Fed

However complex the terminology can get, customers' wish to get their money back is simple.

Chris Buckler, a computer science teacher in Maryland, said his access was cut off to nearly $38,000 in his account at the cryptocurrency trading app Juno, operated by CapitalJ Inc., another Synapse fintech partner. Since his Juno account uses the routing number and an account number of Evolve Bank & Trust, Buckler has been seeking help from bank regulators, senators and congressmen by filing complaints online, he said in an interview.

In emailed responses, both the FDIC and the Consumer Financial Protection Bureau directed Buckler's complaint regarding Evolve Bank & Trust to its federal banking regulator, the Federal Reserve.

In an emailed response from the Fed dated May 16, a representative told Buckler the complaint has been forwarded to the Federal Reserve Bank of St. Louis, which may respond directly within 60 days or longer.

"All complaints are considered in the Federal Reserve's ongoing supervision of the institution," according to the letter, which was viewed by Market Intelligence.

Industry experts said the most challenging part of the situation is what appears to be a mismatch of records between Synapse and Evolve Bank & Trust concerning the amount of deposits to which each bank account is entitled. While best practice is to conduct reconciliation at least once a day to keep ledgers consistent between senders and receivers, the accumulation of unprocessed transactions over time makes a resolution increasingly complex.

"I think in the short run, it's very challenging," said Jonah Crane, a partner at Klaros Group LLC. "There are very limited set of things the regulators can do, other than making sure that everybody is working as hard as they can to try and sort this mess out quickly."

A Fed spokesperson declined to comment.

Consumers confused by FDIC language

A bankruptcy court will hold its next public hearing June 7 to continue working on a resolution. Meanwhile, the case has spurred discussions about what regulators can do in the long term to prevent or reduce the damage in another incident.

Under particular scrutiny are the efforts that fintech companies make to educate consumers that nonbank products are not covered by FDIC insurance. Money deposited through a fintech like Copper or Juno is supposed to end up at the company's FDIC-insured partner bank, but discrepancies in record-keeping between a bank and a non-insured fintech can make the recovery process more complex and worrisome for customers in times of stress.

When Michaud opened the Copper account in October 2023, its website read, "Copper is a financial technology company, not a bank" and named Evolve Bank & Trust as its bank partner. But it also used the FDIC logo and carried the statement, "FDIC insured up to $250K," according to a screenshot on the internet archive website Wayback Machine.

Michaud says this mix of marketing language and banking jargon, plus the resemblance to a bank product in the actual experience, made making sense of this disclosure difficult.

"It's really not fair," he wrote in a message. "Copper made this seem like a regular bank account and advertised it as a way for parents to open bank accounts for their children to teach them financial responsibility. Even sent my daughter a debit card."

Currently, Copper has a more detailed explanation on its website about FDIC insurance, stating: "Bank deposits potentially insured by FDIC up to $250k; Copper is not an FDIC-insured institution."

Buckler also recalled that Juno changed the language on its website when he opened the account. In July 2022, Juno touted "FDIC insured" on US dollar balances up to $250,000 in larger, bolded fonts. Today, Juno no longer mentions FDIC insurance for advertising on its front page.

The FDIC has reported a growing number of nonbank companies' misrepresentations about FDIC insurance coverage. The agency adopted final rules in December 2023, reiterating that such assertions violate regulations. The agency has also been issuing enforcement actions to nonbanks that were deemed noncompliant.

Incidents like this illustrate the importance of fintech companies making language about FDIC insurance coverage comprehensible to consumers, said Chip MacDonald, managing director at law firm MacDonald Partners LLC.

"If there's an FDIC logo, that establishes more credibility for the BaaS and the fintech providers," MacDonald said in an interview.

"But it's damaging to the confidence in the banking system because as we've seen, they may not be doing their job."