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There could be relief for the thousands of Americans whose savings have been locked in frozen fintech accounts for the past two months.
Banks involved in the mess caused by the collapse of fintech broker Synapse have made progress in reconstructing account information for stranded customers, which could result in a release of funds within weeks, according to a person briefed on the matter.
Staff at Evolve Bank & Trust and Lineage Bank in particular have made progress after hiring a former Synapse engineer late last month to unlock data from the failed fintech broker, said the person, who requested anonymity to speak candidly about the process.
The development comes as regulators, including the Federal Reserve and the Federal Deposit Insurance Corporation, are pressuring the banks involved to release funds after media and lawmakers raised awareness of the debacle.
Since May, more than 100,000 customers of fintech apps such as Yotta, Juno and Copper have been left without access to their accounts.
“We are strongly encouraging Evolve to do everything it can to help make money available to those depositors,” Federal Reserve Chairman Jerome Powell told the Senate banking committee on Tuesday.
The sudden optimism from key players involved in the negotiations, including Evolve Chairman and Founder Scot Lenoir, comes after weeks of apparent stalemate in a California bankruptcy court. Poor recordkeeping and a shortage of funds to pay for a forensic analysis have made it difficult to determine who is owed what, bankruptcy trustee Jelena McWilliams said.
The episode revealed how small banks involved in the “banking as a service” sector failed to properly manage unregulated partners like Synapse, founded in 2014 by a first-time entrepreneur named Sankaet Pathak. Evolve and a number of its peers have been reprimanded by banking regulators for shortcomings linked to their programs.
Missing Client Funds
Evolve Bank initially planned to release $46 million it held in payment processing accounts to make partial payments to fintech clients, according to the person familiar with the matter.
That plan changed in recent days when it became clear that something resembling a full reconciliation of customer accounts was possible, the person said.
But it remains unclear how the four major banks involved — Evolve, Lineage, AMG National Trust and American Bank — and what remains of Synapse will deal with a likely funding shortfall, which could hamper repayment efforts.
McWilliams said up to $96 million owed to customers is missing.
Synapse's administrator did not respond to a request for comment. Neither did representatives for AMG and American Bank. The FDIC declined to comment for this article.
On Wednesday, Evolve filed a response to a query from one of its regulators, FINRA, seeking to make clear that while it has some payment processing funds, Yotta app deposits migrated from Evolve to a network of banks in late October 2023.
“We believe there is still some confusion about who is in possession and control of customer funds,” Evolve told FINRA, according to documents obtained by CNBC.
The bank included an October 27, 2023 email from Yotta CEO Adam Moelis to Lenoir, where Moelis confirmed that the funds had left Evolve as of that date.
“Synapse and Evolve are now saying contradictory things,” Moelis said this week in response to a CNBC question. “We don't know who is telling the truth.”
