Synapse Bankruptcy Update: Court Filing Reveals Slow Progress on Releasing End User Funds

The latest court filing from the trustee overseeing the Chapter 11 bankruptcy of Synapse Financial Technologies illustrates the progress — months in the making, incremental and by no means complete — in restoring customers’ access to their own funds.

The filing last Thursday (Sept. 12) from the trustee, Jelena McWilliams, who also was a former chairperson with the Federal Deposit Insurance Corp. (FDIC), noted some numbers, where hundreds of thousands of dollars remain to be distributed in demand deposit accounts.

McWilliams detailed that Evolve Bank & Trust had disbursed roughly $124,000 since the previous update in late August, and now there’s about $520,000 left to distribute. That’s a significant disbursement and winnowing down of the more than $6 million that had been held in May. Similarly, Lineage Bank, another partner bank of Synapse, has $190,000 “remaining” as of last week, down from nearly $389,000 in May.  Thus far, McWilliams estimated that the total DDA distribution across Synapse’s partner banks has been about 89%.

Waiting for FinTech Responses

But as evidence of the hiccups that are still in place, McWilliams noted in the filing that Evolve “continues to work to distribute additional DDA funds, but progress has been slow because 5 Fintech Partners have not responded to outreach for balance verification and payment instructions.”

The filing went on to detail that the partner banks “are continuing reconciliation efforts and information outreach with the objective of making additional distributions of reconciled funds to end users as soon as possible. Experience to date suggests that a relatively small percentage of end user funds at a partner bank may be subject to additional delays in distribution due to matters unrelated to reconciliation efforts, such as delays in obtaining current payment instructions for end users and returned payments.”

The State of the FBO Accounts

Elsewhere in the filing, the progress on the distribution of “for benefit of” accounts has been arguably less robust. By way of definition, the FBO accounts are typically set up as pooled accounts that allow FinTech companies to manage funds on behalf of their users. In the meantime, the FinTechs do not wind up assuming legal ownership of the account.

McWilliams estimated in the report that of the roughly $219 million in FBO funds held by partner banks when Synapse filed for bankruptcy, there’s still 25% left to be distributed, to the tune of $54 million. Within that tally, just under $47 million and $6.2 million are tied to Evolve and to Lineage Bank, respectively.

“Evolve reports that it is progressing its reconciliation efforts and continues to expect to make distributions based on such reconciliation … [by] approximately October 18th,” the filing added.

As PYMNTS reported Sept. 6, the FDIC will be focusing more fully on FBO accounts in the coming weeks and months, where new regulations may mandate that banks linking with the FinTechs are likely to be mandated to set up ledgers to more accurately track fund flows and where they were held.