Synapse seeks liquidation after failed asset sale

Synapse Financial Technologies has formally asked to convert its Chapter 11 bankruptcy case into a liquidation (Chapter 7) or, alternatively, to dismiss the case entirely.

This request follows the failure to secure a viable buyer for its assets after an auction deadline passed with no successful bids, and the company now lacks funds to support further auction processes.

The trustee overseeing the case has stated that no funds remain to trace client cash, making it nearly impossible to reconcile customer accounts or distribute remaining assets.

The ongoing bankruptcy proceedings have left thousands of customers and over 100 fintech partners—including notable apps like Yotta, Juno, and Yieldstreet—with frozen or missing funds, with a shortfall estimated between $65 million and $95 million between bank-held funds and amounts owed to end users.

As of June 2025, the case is nearing its final stages, with liquidation appearing increasingly likely as the most viable resolution.

How did their due diligence fail so badly?

1. Overreliance on Fintech Self-Reporting
   Partner banks like Evolve Bank & Trust and Lineage Bank failed to independently verify Synapse’s ledger accuracy, relying instead on the middleware provider’s assurances about fund allocations. This lack of direct oversight allowed discrepancies between bank-held funds and customer balances to go undetected.

2. Inadequate Contingency Planning
   Banks assumed Synapse’s operational resilience without requiring robust disaster recovery plans. When Synapse abruptly cut off access to its systems, partner banks couldn’t reconcile accounts, leaving $65–$95 million unaccounted for.

3. Regulatory Blind Spots
   Banks treated Synapse as a vendor rather than a critical infrastructure provider, underestimating their responsibility for compliance. The FDIC’s lack of direct authority over fintech intermediaries further enabled lax oversight.

4. Ignoring Prior Red Flags
   Synapse had a history of mismanagement, including unauthorized movement of customer funds and unresolved ledger discrepancies. Banks either missed or downplayed these issues during vetting.

Red Flags that Should Have Been Caught

• Complex Account Structures: Synapse used opaque “For the Benefit Of” (FBO) accounts across multiple banks, making fund tracking nearly impossible.

• Lack of Transparency: Synapse withheld granular data from banks, claiming proprietary technology. Banks accepted this without audits.

• Rapid Client Growth Without Scaling Controls: Synapse onboarded 100+ fintech partners but lacked systems to manage risk at scale.

• Regulatory Actions Against Partners: Evolve Bank had prior issues with FTX-related freezes, signaling systemic risk management failures.

• No Independent Audits: Synapse’s financials and ledgers weren’t independently verified, allowing mismanagement to persist.

The following banks face heightened exposure due to similar partnerships:

Emerging risks in "modular banking" models that distribute deposits across multiple banks without clear accountability

Recommendations for Lenders

1. Demand Real-Time Ledger Access: Insist on direct API access to fintech partners’ transaction records to enable independent reconciliation.

2. Enforce Third-Party Audits: Require annual audits of fintechs’ financials and compliance practices by accredited firms.

3. Avoid Opaque Account Structures: Scrutinize partnerships using FBO or pooled accounts; prioritize transparent, individual account setups.

4. Monitor Regulatory Precedents: Track FDIC’s proposed recordkeeping rules and enforcement actions against banks like Evolve.

Synapse’s collapse underscores the need for lenders to treat fintech partnerships as high-risk ventures requiring rigorous, ongoing oversight—not just initial vetting. Banks that fail to adapt will likely face litigation, regulatory penalties, and reputational damage akin to Evolve’s crisis.

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