Teen fintech company Copper was forced to abruptly shut down its bank account and debit card services this month, reflecting the fallout from the collapse of banking-as-a-service provider Synapse.
In a recent letter to Copper clients, Copper co-founder and CEO Eddie Bellinger said the fintech company chose to discontinue these services because the banking middleware services it uses are “soon to be shutting down. Despite our advance planning, this event has forced us to close our bank accounts much sooner than we anticipated.”
“Going forward, we continue our mission by partnering with leading, trusted banks across the U.S. to offer the same family banking products,” Bellinger wrote May 12. “This strategic decision allows us to remove enrollment plan and cost barriers for our members by offering Copper accounts free of charge to children, teens, young adults and families,” he added.
While certain Copper services were offered through Synapse, Copper-branded debit cards are issued by Evolve Bank & Trust, according to the fintech company’s website.
Copper’s announcement is the latest in a series of developments after TabaPay announced it was acquiring Synapse last month.
Funds transfer platform TabaPay offered a purchase price of $9.7 million to acquire Synapse’s assets, but the fintech company filed for Chapter 11 bankruptcy protection on April 22. Synapse has approximately 50 to 99 creditors with estimated assets of approximately $10,000,001 to $50,000,001 and estimated liabilities of approximately $10,000,001 to $50,000,001.
A TabaPay spokesperson told Banking Dive earlier this month that the company pulled out of the deal within weeks because it “failed to meet the closing conditions of the acquisition agreement.”
Synapse’s banking partner, Evolve, was supposed to fully fund the “beneficiary” accounts as a condition of the closure, but the bank failed to do so, Synapse CEO Sankaet Pathak told Banking Dive via LinkedIn message earlier this month.
However, an Evolve spokesman denied the allegations, saying there were no closing conditions that the bank needed to meet.
“Evolve was not a party to the Tabapay agreement with Synapse and there were no closing conditions to be met. The settlement agreement with Synapse included a funding condition. Evolve has met that condition,” an Evolve spokesperson said in an emailed statement.
Copper’s abrupt closure of bank accounts and debit cards left some customers unable to access their funds, but the fintech is working with banking partners AMG National Trust Bank and Synapse to return customers’ funds as quickly as possible, Behringer told TechCrunch.
Bellinger said Copper began refunding customer funds after learning about the difficulties with Synapse and TabaPay transactions. Only a single-digit percentage of customers were not refunded before Copper’s service was terminated, according to the publication.
Last week, a bankruptcy court judge appointed Jelena McWilliams, managing partner at Cravath, Swaine & Moore and former chairwoman of the Federal Deposit Insurance Corp., as the Chapter 11 trustee in Synapse’s bankruptcy case. Creditors are also seeking to convert the case to Chapter 7 bankruptcy, which would help liquidate the company.
“The Trustee should immediately engage with stakeholders, develop a plan to fund the continued preservation of Synapse’s systems and data, continue the information-sharing process, and hopefully reach agreements with participating banks to enable the return of funds as quickly as possible to end users – the rightful owners of those funds,” U.S. District Judge Martin Barash said. U.S. Bankruptcy Court for the Central District of California This was pointed out during the hearing related to the appointment.
According to the court order, the court is scheduled to hold a conference on the status of the Chapter 11 bankruptcy case on June 7.
What happens next?
Companies like Synapse have been building a bridge between fintech companies and banks for years, ensuring that customers’ deposits and withdrawals are made accurately in their accounts.
“Clients of the various fintechs involved (e.g. Mercury, Yotta, Juno, Copper) may have held funds in shared accounts with Evolve or sweep accounts with Synapse Brokers. How their funds are treated and whether they are covered by insurance will depend on the circumstances,” Michel Alt, founder and partner at financial services advisory and investment firm Claros Group, said in an email.
Fintechs are not banks, so they are not insured by the Federal Deposit Insurance Corporation or regulated by the Federal Reserve or the FDIC. Additionally, none of the banks Synapse partners with, including American Bank, NA, AMG National Trust, or Lineage Bank, have failed, so the FDIC cannot step in or pay out harmed customers.
Although Evolve’s funds are FDIC insured, the bank is not a failed financial institution but is still in operation, and many end users may have been misled by advertising and disclosures about the FDIC insurance, Alt noted.
“I can understand interpreting ‘FDIC guaranteed’ as ‘guaranteed absolutely,’ but that’s not what an FDIC guarantee means,” she said.
Evolve claims it cannot release the frozen funds Alt said the Fed needs more information to verify customer claims. Customers could file complaints with the Fed, Evolve’s federal prudential regulator, the CFPB or any state agency that licensed the fintechs (such as Copper) that deposited funds on their behalf with Evolve, she noted.
Ultimately, it’s up to the bankruptcy court and regulators to resolve the case, Alt said. The Federal Reserve won’t arbitrate claims between bankruptcy creditors, but he expects it is closely monitoring the situation.
“This situation may ultimately result in enforcement orders from the Fed or the CFPB, which could include compensation to customers, but that will likely take months, if not years,” Alt said.
