Evolve Bank & Trust announced Monday that it will soon start releasing funds to consumers whose accounts have been frozen in a monthslong dispute between Evolve and a banking-as-a-service middleware provider, Synapse.
Synapse, which
In the course of handling Synapse's bankruptcy, former FDIC Chair Jelena McWilliams, who is the bankruptcy trustee, has identified a $65 million to $95 million shortfall between the amount of money Synapse says is in end users' accounts and the amount its bank partners — Evolve, American Bank, AMG National Trust and Lineage Bank — say is in those accounts. Meanwhile, thousands of customers have been left
Each side has blamed the other for this gap.
In a July statement, Memphis-based Evolve said its investigation of Synapse's ledgers "has revealed numerous material irregularities and inconsistencies in Synapse Brokerage program balances. In multiple instances, the ledgers provided by Synapse show significant differences in Synapse Brokerage end-user balances from one day to the next, without corresponding movement of funds. Some of these irregularities impact millions of dollars of end-user funds, without explanation."
But in a
Consumers would call their fintech to say their deposit was missing, Pathak said. "The fintech would reach out to us, we would reach out to Evolve and then lo and behold you'll find that OK, there were quite a few payments that didn't make it to us that, by the way, we covered," he said. "Already posted on the core, already were posted on the GL [general ledger]."
According to Pathak, also in late August or early September 2023, Evolve and a payment partner, TabaPay, were both debiting some fees from "for benefit of" accounts on the customer general ledgers. Pathak also said Synapse's pricing schedule wasn't clear.
In a lawsuit Yotta Technologies filed against Evolve in September, it said Evolve "utterly failed in its most basic duty to its customers" by misappropriating or misplacing tens of millions of dollars in customer funds.
In its announcement Monday, Evolve did not say how much money Synapse's fintech customers' customers would receive. It also did not address the gap between the different ledgers.
Evolve is responsible for making sure that customer funds it has on deposit are paid out to the appropriate people, noted Konrad Alt, partner and co-founder of Klaros Group.
"The significance of today's announcement appears to be that Evolve believes it now has the information it needs to make those payments," Alt said. "That's great news as far as it goes, but it doesn't mean those customers, or other customers affected by the Synapse collapse, will be made whole by Evolve's payments, only that they are getting the money that Evolve believes it 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 that ran from depositors through various fintechs and Synapse to a few banks, a lot of money apparently went missing. The gap presumably arose through some combination of misappropriation of customer funds and poor risk management, but we need more facts before we can reach that conclusion firmly."
Another potential issue is that at one point, Synapse moved some money into a brokerage arrangement with AMG, which was overnight sweeping the accounts for deposit insurance, according to Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at the Richard Paul Richman Center for Business, Law and Public Policy at Columbia Business School.
"There's liability all around," Baker said in an interview. "There's no doubt that Evolve failed at the most fundamental things that it should be doing, which is to the extent it has customer money in bank accounts, it should be reconciling those daily and making sure the reconciliations work."
Scot Lenoir, founder of Evolve Bank and Trust, said, "Evolve has been deeply committed to the reconciliation of Synapse Brokerage end user funds since we identified significant irregularities in end user balances reported by Synapse," in a statement.
On Wednesday, Evolve will launch a resource center at reconciliationbyevolve.com to provide more information on the reconciliation and the anticipated timeline for returning funds held at Evolve to Synapse Brokerage end users.
In the end, Evolve may have to make all customers whole out of its own pockets, Baker said.
On both sides, "the level of basic incompetence in the management of Synapse and the banks that dealt with it is kind of breathtaking," Baker said.
