The complaint detailed how an alleged breakdown in Synapse’s record-keeping and fund management created financial instability and hardship for thousands of consumers.
The adversary proceeding complaint, filed as part of the ongoing Synapse bankruptcy proceeding, from the CFPB said that Synapse engaged in “unfair acts or practices by failing to maintain adequate records of the location of consumers’ funds and failing to ensure those records matched the records maintained by the partner banks.”
The Allegations
Synapse operated as a technological “bridge” between nonbank FinTech platforms that directly interfaced with consumers and the traditional partner banks that held consumer money, issued debit cards, and processed transactions, the complaint said.
As part of its Cash Management Program, Synapse allegedly directed the transfer of consumer funds across multiple partner banks and its own subsidiary, Synapse Brokerage, holding funds in omnibus accounts for the benefit of consumers, according to the complaint.
Synapse was responsible for tracking and maintaining records of these fund movements and ensuring their accuracy against the partner banks’ records, the complaint said. The CFPB seeks to permanently enjoin Synapse from future violations, secure redress for affected consumers, impose civil money penalties, and obtain other appropriate relief.
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Key data points in the complaint illuminating the issues of record-keeping, reconciliation of funds, and liabilities in the Synapse case included:
- Fund Shortfall and Record Discrepancies: Synapse’s records were found not to match those maintained by multiple partner banks, including Evolve Bank & Trust, AMG National Trust Bank and Lineage Bank. As early as September 2023, a deficit of tens of millions of dollars was identified at Evolve, with Synapse’s records indicating more funds than the bank actually held.
Following Synapse’s Chapter 11 bankruptcy filing in April 2024 and the eventual appointment of a Chapter 11 trustee, it became apparent that the collective amount of funds held by all partner banks for end users was less than what Synapse’s records indicated. The trustee estimated this shortfall to be between $60 million and $90 million. Synapse was specifically responsible for tracking individual end-user funds across its subsidiary and the various partner banks.
- Widespread Consumer Injury and Lack of Access to Funds: The discrepancies between Synapse’s records and those of its partner banks led to “substantial injury” for thousands of consumers. After Synapse’s operations deteriorated and ceased in May 2024, partner banks like Evolve and Lineage stopped processing transactions and instituted freezes on activity, preventing consumers from accessing their money.
Consumers were unable to use debit cards, withdraw or transfer funds, pay bills or receive essential deposits, such as wages and salaries. Many consumers reported severe hardships, including being unable to afford food, pay rent or mortgages, cover medical care or meet other critical bills.
- Synapse’s Role as a “Service Provider” and Unavoidable Harm: The CFPB classified Synapse as a “service provider” under the Consumer Financial Protection Act, owing to its material role in providing technology and software that connected FinTech platforms and partner banks, participating in the design, operation and maintenance of consumer financial products and processing transactions.
The CFPB said in the complaint that Synapse’s failure to maintain adequate and matching records constitutes “unfair acts or practices” because it caused substantial injury that consumers could not reasonably avoid.
In November, as the Synapse saga wound on, Ingo Payments CEO Drew Edwards told PYMNTS in an interview: “My sense is they tried oversimplification and potentially took millions of consumers’ money accounts, and put them into a single commingled omnibus account without proper real-time or even daily reconciliation of very complicated money in and money outflows.”
The CFPB’s action this week against Synapse serves as a reminder to the financial services industry, particularly those operating at the nexus of FinTech and traditional banking, about the non-negotiable need for accurate record-keeping and diligent fund reconciliation. Operational lapses in tracking consumer assets can translate into severe real-world consequences for end clients.
