Evolve Bank says it will begin returning money to Synapse end users

Evolve Bank & Trust said Monday that it will soon begin releasing funds to consumers whose accounts were frozen in a months-long dispute between Evolve and a banking-as-a-service middleware provider, Synapse.

synapse, the filed for bankruptcy in Aprilconnected banks and fintechs such as Yotta Technologies, Juno and Yieldstreet. Yotta, for example, offers a fixed-rate savings account and a credit card, but requires an FDIC-insured bank to manage its customers’ funds. Yotta and other fintechs sent consumer funds to Synapse, which they invested in accounts “for the benefit of” at partner banks.

In the course of resolving Synapse’s bankruptcy, former FDIC Chair Jelena McWilliams, who is acting as bankruptcy trustee, identified a shortfall of $65 million to $95 million between the amount of money Synapse said was in end users’ accounts and the Amount from its partner banks – Evolve, American Bank, AMG National Trust and Lineage Bank – approximately in these accounts. Thousands of customers have now left without access to their money.

Each side blamed the other for this gap.

In a July statement, Memphis-based Evolve said its investigation of Synapse’s ledgers “revealed numerous material irregularities and inconsistencies in the balances of the Synapse brokerage program. In several cases, the ledgers provided by Synapse show significant discrepancies in Synapse Brokerage’s end-user balances.” “Some of these irregularities impact millions of dollars of end-user funds without explanation.”

But in one current podcast Sankaet Pathak, the former CEO and founder of Synapse, moderated by venture capitalist Lex Sokolin, said his company had problems reconciling with Evolve in August 2023.

Consumers would call their fintech and say their deposit is missing, Pathak said. “The fintech company reached out to us, we reached out to Evolve, and then you’ll find that there were a whole bunch of payments that didn’t get to us, which we covered, by the way. “, he said. “Already posted in the core, have already been posted in the GL [general ledger].”

Pathak said Evolve and a payment partner, TabaPay, also deducted some fees from “for the benefit of” accounts on customers’ ledgers in late August or early September 2023. Pathak also said that Synapse’s pricing plan is not clear.

A lawsuit Yotta Technologies filed against Evolve in September said Evolve had “completely failed in its most basic duty to its customers” by misappropriating or misplacing tens of millions of dollars in customer funds.

In its announcement on Monday, Evolve did not say how much money Synapse’s fintech customers would receive. Nor was the gap between the various ledgers addressed.

“Evolve is responsible for ensuring that deposited customer funds are paid out to the appropriate people,” emphasized Konrad Alt, partner and co-founder of the Klaros Group.

“The significance of today’s announcement appears to be that Evolve believes it now has the information it needs to make these payments,” Alt said. “While that’s great news, that doesn’t mean that these customers or other customers affected by the Synapse collapse will recover through Evolve’s payments, but only that they will receive the money they believe Evolve owes them.” ”

“We still don’t know where the money went, and today’s announcement offers no help with that question,” Alt said. “Somewhere in the chain, which ranged from depositors to various fintechs and Synapse to some banks, is Apparently a lot of money was lost. The breach was probably caused by a combination of misappropriation of client funds and poor risk management, but we need more facts beforehand. We can come to that conclusion.”

Another potential problem is that at some point Synapse transferred some money into a brokerage agreement with AMG, which raided deposit insurance accounts overnight, according to Todd Baker, managing director at Broadmoor Consulting and senior fellow at the Richard Paul Richman Center for Economics. Law and Public Policy at Columbia Business School.

“There is liability everywhere,” Baker said in an interview. “There is no doubt that Evolve has failed at the most basic things it should be doing, namely reconciling the extent to which it has customer funds in bank accounts on a daily basis and ensuring that the reconciliations work.”

Scot Lenoir, founder of Evolve Bank and Trust, said in a statement: “Evolve has been committed to reconciling Synapse Brokerage’s end-user funds since we discovered significant irregularities in Synapse’s reported end-user balances.”

On Wednesday, Evolve will launch a resource center at reconciliationbyevolve.com to provide further information about the reconciliation and the expected timeline for returning funds held with Evolve to Synapse Brokerage end users.

In the end, Evolve may have to pay all customers out of its own pocket, Baker said.

On both sides, “the level of fundamental incompetence in the management of Synapse and the banks that dealt with it is breathtaking,” Baker said.