Key takeaways
- Synapse Financial Technologies, a banking-as-a-service middleware company, filed for bankruptcy in April 2024.
- The court-appointed trustee, former FDIC chair Jelena McWilliams, reported a shortfall of roughly $65 million to $96 million between what end users were owed and the funds held at partner banks.
- Many end users of fintech apps built on Synapse lost access to their money for months.
- The root cause was not one event but the accumulation of unreconciled differences between ledgers and bank accounts over time.
What happened
Synapse sat between consumer fintech apps and the banks that held their customers' money. The apps offered accounts and cards; partner banks, including Evolve Bank & Trust, held the funds in pooled accounts; Synapse kept the ledger that recorded each end user's share. When Synapse entered bankruptcy in April 2024 and its systems became unavailable, no single party could show who owned what.
The bankruptcy trustee, former FDIC chair Jelena McWilliams, worked with the banks to reconcile the records. The reported result was a shortfall of roughly $65 million to $96 million: end users were recorded as owed more than the banks held. Many could not access their funds for months, and some were offered only partial repayments.
How the gap formed
The gap did not appear on one day. Over years, money moved between several banks and several pooled accounts. Each movement had to be reflected correctly in the Synapse ledger and in each bank's records. Where a movement was recorded on one side but not the other, or at a different amount, a difference was created. Where differences were not investigated and resolved promptly, they accumulated. By the time the system stopped, the accumulated differences were too large and too old to resolve quickly.
This pattern is the same one behind the safeguarding shortfalls the FCA found in failed UK payment firms. Our guide to what safeguarding is sets out the comparison.
The regulatory response
US bank regulators increased scrutiny of bank-fintech partnerships, and several partner banks entered enforcement orders requiring stronger oversight of third-party ledgers and reconciliation. In September 2024 the FDIC proposed a recordkeeping rule for custodial deposit accounts with transactional features, which would require banks to keep records identifying each beneficial owner and the balance attributable to each, with balances that are accurate and reconciled daily. Our guide to FBO account reconciliation covers the rule and the daily check in detail. Our guide to the FDIC custodial account recordkeeping proposal sets out its requirements and current status.
The lessons for any firm holding money for others
The first lesson is to reconcile daily, per bank and per account, never only in total. The second is that every difference needs a cause, an owner and a resolution date, and old differences must be escalated. The third is that the ledger must be reconcilable by someone other than the company that runs it: banks, auditors and, if it comes to it, a trustee. The fourth is that the records must survive the failure of any one party, including the ledger provider.
| Failure seen at Synapse | Control that prevents it |
|---|---|
| Differences between ledger and banks left unresolved | Daily reconciliation with aged, owned differences |
| Pooled balances reconciled only in total | Reconciliation per bank and per account |
| Records held by one intermediary | Records the bank and fintech can each reconcile independently |
| No quick way to show each end user's balance | Beneficial-owner records maintained and tested daily |
How Safeheld supports it
Safeheld reconciles each pooled account at each bank against the ledger's customer balances every day, ages every difference and keeps a full history that banks, auditors and examiners can review. See FBO account reconciliation, banking-as-a-service reconciliation and Safeheld reconciliation.
Frequently asked questions
What was Synapse?
A banking-as-a-service middleware company that connected fintech apps to partner banks and kept the ledger of end-user balances.
How large was the Synapse shortfall?
The trustee reported a shortfall of roughly $65 million to $96 million between what end users were owed and what banks held.
What caused the Synapse shortfall?
Unreconciled differences between the Synapse ledger and partner bank records that accumulated over time.
What did regulators do after Synapse?
Increased scrutiny of bank-fintech partnerships, and the FDIC proposed a recordkeeping rule for custodial deposit accounts in September 2024.
References
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.