The recent bankruptcy filing of Synapse Financial Technologies highlights the risks to banks of establishing “for the benefit of” or “FBO” accounts. Synapse operated a fintech platform used by over 100 different fintech partners. Using Synapse’s platform, the fintech partners were able to market and establish demand deposit accounts for consumers at several banks. The banks engaged in various aspects of the programs established by Synapse and the fintechs, including the establishment of consumer demand deposit accounts (“DDAs”), the provision of ACH services, and the establishment of FBO accounts where funds were deposited to reflect balances owed to customers who established DDAs. Upon commencement of the bankruptcy case, Synapse had planned to sell its platform assets to another fintech entity. However, the sale broke down when a rift arose between Synapse and one of its banking partners, Evolve Bank & Trust. According to published reports, many of the consumer customers have been unable to access the accounts they established through the fintechs. Less than a month into the case, the Bankruptcy Court took the extraordinary step of appointing Jelena McWilliams (the former FDIC Chair and current practicing lawyer) as the Chapter 11 Trustee.

Trustee McWilliams filed an initial status report on June 6, 2024, and a second status report on June 13, 2024. The status reports note significant issues in connection with Synapse’s operations, including problems with the FBO accounts established at the four partner banks. Synapse has ceased operating, and the partner banks have had great difficulty accessing the Synapse platform to obtain the information necessary to balance and reconcile the FBO accounts. The four partner banks have attempted to meet and reconcile balances between themselves, but the Trustee’s reports suggest they have been largely unsuccessful. Based on their initial efforts, the partner banks have determined that they are collectively holding $180 Million in cash in their Synapse-related FBO and DDA accounts. However, the banks believe this sum is $65-95 Million short of the outstanding obligations owed to accountholders! At this point, the partner banks are continuing their reconciliation efforts, and the Trustee has determined that the assets in the FBO accounts are not part of the Synapse bankruptcy estate. Unfortunately, however, it appears that the banks will have liabilities to the DDA customers that exceed the balances held in their respective accounts.

In addition to the deposit shortfalls, the Synapse case may also trigger regulatory concerns for the banks involved. The Federal Reserve Board entered into a “Cease and Desist Order Issued Upon Consent” with Evolve Bank & Trust on June 11, 2024. The Order criticized the bank’s “Open Banking Division” which it used to contract with fintech partners who, in turn, offered financial services to end users, either directly or through partnership with other fintechs. In the Order, the Federal Reserve directed the bank to place a freeze on all new fintech relationships and mandated that the bank implement a host of compliance, vendor management, and risk control improvements.

While the Synapse unwind debacle continues, banks would be well advised to consider carefully any FBO accounts they have established, particularly those set up through fintech relationships. Questions the bank should ask itself would include: (1) Does the bank know who it is holding the funds “for the benefit of” for each FBO account? (2) Has the Bank contemplated the additional risks it is taking by accepting the FBO designation on the account? (3) Does the bank have access to the underlying records identifying the portions of the FBO balance owned by each of the FBO beneficial owners? (4) Has the bank established reconciliation processes and procedures, including spot checks and audits, to confirm that the fintech partner is properly accounting for the funds in the FBO account? (5) Does the Bank have at least “view only” access to the fintech’s platform to independently review, reconcile, and confirm the FBO account balances as well as any individual consumer account balances contemplated by the FBO structure? The Synapse case will ultimately provide a good “wake up call” for banks who have FBO accounts established for fintech partners. Banks need to be certain they understand and control the risks presented by these relationships.

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