Banks in Synapse mess make progress toward releasing deposits of stranded fintech customers

There may be relief for the thousands of Americans whose savings have been locked in frozen fintech accounts for the past two months.

Banks involved in the mess caused by the collapse of fintech intermediary Synapse have made progress piecing together account information for stranded customers that could result in a release of funds in a matter of weeks, according to a person briefed on the matter.

Staff of Evolve Bank & Trust and Lineage Bank in particular have made headway after hiring a former Synapse engineer late last month to unlock data from the failed fintech middleman, said the person, who asked for anonymity to speak candidly about the process.

The development comes as regulators, including the Federal Reserve and the Federal Deposit Insurance Corporation, pressure the banks involved to release funds after media and lawmakers have heightened awareness of the debacle.

Beginning in May, more than 100,000 customers of fintech apps like Yotta, Juno and Copper have been locked out of their accounts.

"We're strongly encouraging Evolve to do whatever it can to help make money available to those depositors," Federal Reserve Chair Jerome Powell told the Senate banking committee Tuesday.  

The sudden optimism of key players involved in the negotiations, including Evolve chairman and founder Scot Lenoir, comes after weeks of apparent gridlock in a California bankruptcy court. Shoddy record keeping and a dearth of funds to pay for a forensic analysis have made it difficult to piece together who is owed what, bankruptcy trustee Jelena McWilliams has said.

The episode revealed how small banks involved in the "banking-as-a-service" sector didn't properly manage unregulated partners like Synapse, founded in 2014 by a first-time entrepreneur named Sankaet Pathak. Evolve and a string of peers have been reprimanded by bank regulators for shortcomings tied to their programs.

Evolve Bank initially planned to release $46 million it held from payment processing accounts to give fintech customers partial payments, according to the person with knowledge of the matter.

That plan changed in recent days when it became clear that something approximating a full reconciliation of customer accounts was possible, the person said.

But it remains unknown how the four main banks involved — Evolve, Lineage, AMG National Trust and American Bank — and what remains of Synapse will deal with a likely shortfall of funds, and that could hinder repayment efforts.

Up to $96 million owed to customers is missing, McWilliams has said.

The Synapse trustee didn't respond to a request for comment. Neither did representatives for AMG and American Bank. The FDIC declined to comment for this article.

On Wednesday Evolve filed a response to questioning from one of its regulators, FINRA, seeking to make it clear that while it holds some payment processing funds, deposits from the app Yotta migrated out of Evolve and to a network of banks in late October 2023.

"We believe there is still some confusion regarding who is in possession and control of customer funds," Evolve told FINRA, according to documents obtained by CNBC.

The bank included an Oct. 27, 2023, email from Yotta CEO Adam Moelis to Lenoir where Moelis confirmed that funds had left Evolve as of that date.

"Synapse and Evolve are now saying contradictory things," Moelis said this week in response to an inquiry from CNBC. "We don't know who's telling the truth."