Synapse bankruptcy leaves me with a financial bind: $38,000 in limbo

• Millions of Americans were left without access to their money for more than a week due to a dispute between a fintech startup and its banking partners, as per recent court documents.
• Synapse, a fintech company that acts as an intermediary between customer-facing fintech brands and FDIC-insured banks, has had conflicts with some of its partners over the amount of customer balances it owes.
• Several fintech services left their users without access to their funds, as per testimonials filed in a California bankruptcy court this week.

Millions of Americans were left without access to their money for more than a week due to a dispute between a fintech startup and its banking partners, as per recent court documents.

Synapse, a fintech startup backed by Andreessen Horowitz, has had conflicts with some of its partners over the amount of customer balances it owes.

In April, Synapse declared bankruptcy and lost several key partners, which led to a deterioration of the situation. On May 11, Synapse cut off access to a technology system that enabled lenders, including Evolve Bank & Trust, to process transactions and account information, according to court filings.

Several fintech services have left their users stranded without access to their funds, as per testimonials filed in a California bankruptcy court this week.

A customer, Chris Buckler, stated in a May 21 filing that his funds were locked on crypto app Juno due to the Synapse bankruptcy.

"Bucker wrote, "I am growing increasingly desperate and unsure of what to do, as I now have over $38,000 tied up due to the halt of transaction processing. This money took me years to accumulate.""

Synapse, the largest "banking as a service" provider, assisted a wide range of U.S. fintech companies in offering services such as checking accounts and debit cards. Its former partners included Mercury and Juno, well-known fintech firms that catered to specific groups such as startups, gig workers, and crypto users.

According to an April filing from founder and CEO Sankaet Pathak, Synapse had contracts with 20 banks and 100 fintechs, resulting in approximately 10 million end users.

Evolve declined to comment on the email seeking comment from Pathak, instead referring to a statement on their website that read, in part:

The abrupt shutdown of essential systems by Synapse without notice and failure to provide necessary records has put end users at risk, hindering our ability to verify transactions, confirm end user balances, and comply with applicable law, the bank stated.

The reason why Synapse shut down the system remains unclear, as no explanation was provided in the filings.

The freezing of customer funds highlights the weaknesses in the banking as a service (BAAS) partnership model and a potential oversight by regulators.

The BAAS model, employed by Chime, enables small FDIC-backed banks to provide Silicon Valley-style startups with their banking capabilities. This ecosystem has helped these companies challenge the dominance of American banking giants.

Jason Mikula, a consultant and newsletter writer, stated that customers erroneously assumed that since funds are kept in real banks, they were as secure and accessible as other FDIC-insured accounts.

Mikula stated that this is over 10 million individuals who cannot afford to pay their mortgages or purchase groceries, which constitutes another catastrophe.

The FDIC typically intervenes to protect customers when the banks involved in a dispute have failed, but this has not happened yet since the banks have not failed, according to Mikula.

The FDIC and Federal Reserve didn't immediately return calls seeking comment.

In his plea to the judge, Martin Barash, Buckler emphasized that although he has other financial accounts aside from the one that is currently frozen, not everyone is as fortunate.

""The federal government is not willing to assist us, as there are millions of people who are in a much more dire situation," Buckler wrote."