The key to solving the Synapse case

By Aaron Holmes, Founder and CEO, Kani Payments

The collapse of US banking-as-a-service (BaaS) provider Synapse underscores the fundamental importance of accurate reconciliations based on standardized data and shows the impact these reconciliations can have on securing customer funds.

As investigators unravel a complex web of transactions and operational malfunctions and track down millions of dollars in missing customer funds, this unfortunate case illustrates the complexity of today's payments ecosystem – and why reconciliation is at the heart of the case.

In short, Synapse acted as a BaaS intermediary that enabled customer-facing fintechs to accept deposits from end customers and hold them on the Synapse platform. After Synapse filed for bankruptcy in May 2024, it came to light that around $85 million in customer funds from 100,000 customers had disappeared. Many fintechs and their end customers could no longer access the funds held on the Synapse platform to pay essential bills or living expenses. In some cases, business owners could not pay their employees or suppliers.

As the court proceedings continue, we can look at public documents and court testimony to gain insight into what happened. Ultimately, finding out what went wrong is important if other banks and fintechs want to avoid a similar fate.

What caused the synapse breakdown – and why reconciliation is the focus

The investigations so far have revealed significant deficiencies, including the shocking allegation that Synapse failed to maintain accurate accounting records and failed to make complete and accurate reconciliations, resulting in incorrect customer balances.

Liquidators have since explained that the recovery and refund of client funds has been delayed due to deficiencies in Synapse's transaction reconciliation. While some partner banks have tracked down and distributed funds held in demand deposit accounts (DDAs), the reconciliation and refund of funds held in “for benefit of” (FBO) accounts is causing major problems. The search for the money in the Synapse case now requires forensic investigations, which are time-consuming and costly for all parties involved.

The challenges identified in relation to the compatibility of work and family life include:

• Synapse placed fintechs' client funds at multiple banks, meaning a single end user had balances at multiple institutions, making reconciliation more complicated.
• Synapse's ledgers and records are either inaccurate or inaccessible, making it impossible to accurately reconcile money movements.
• Interbank transfers conducted by Synapse have not been specifically allocated to end users or partner customers.

Failure to protect customer funds: regulators on high alert

A sworn statement in court from Synapse's former CEO reveals that the company also commingled funds from its fintech clients and their customers with the accounts of its own parent and subsidiary companies. This makes reconciliation even more difficult and puts the safety of customer funds at risk. The result? Investigators don't know where the missing funds are, what transactions they involved, and which customers need reimbursement.

Protecting customer funds depends on accurate reconciliations. Without accurate data to match transactions and calculate customer account balances, fintechs cannot know with certainty where customer funds are and what needs to be kept in a separate account. And regulators are in no mood to show leniency: earlier this year, the UK's Financial Conduct Authority (FCA) said it was actively reviewing the protection processes of the companies concerned.

While the FCA expects firms to have “reasonable organisational arrangements” in place to protect their customers’ funds, there are no standardised or consistent guidelines on how to implement them. Firms are left to decide for themselves what their organisational arrangements should look like, adding further pressure to already overstretched internal finance teams.

Under FCA requirements, fintechs are required to safeguard funds received in exchange for electronic money issued to customers. This means that the funds must be kept segregated in an account dedicated only to that purpose. Fintechs must also ensure that segregated funds are not commingled with other parties' funds.

It should be standard practice to perform daily account reconciliations to ensure security. Accurate reconciliations should result in a daily compliance balance or check total of zero. But without accurate reconciliation data, many fintechs will miss errors or suspicious transactions that need urgent remediation.

The complex BaaS ecosystem: more challenges in voting

As the Synapse case continues, the BaaS business model has come under intense scrutiny. When each entity has a different account, general ledger or sub-ledger, a different reconciliation process and its own way of handling transaction data, it is easy to see how quickly things can go wrong. But one bad apple should not spoil the whole basket. The BaaS model undoubtedly still has a promising future, but like other financial sectors, it needs to develop reconciliation and reporting processes that provide sufficient protection for end customers.

To understand the Synapse saga, one must first understand the inherent complexities of the BaaS ecosystem. Problems arise from the various payment methods and financial institutions involved. It is difficult to track liquidity and cash flow when settlement timelines depend on whether the payment method is a debit card, credit card, bank transfer or bulk payment. In addition, transaction processors have their own methods of parsing data – some use XML, some use CSV, some use JSON. There is no single, standardized data format. Ultimately, there is no way to effectively track and manage these funds without being able to standardize and reconcile the data across multiple sources.

While reconciliation is often viewed as a necessary back-office task, the recent Synapse case shows that it is a mission-critical control step that makes the difference between survival and failure. It should serve as a much-needed warning to companies to develop robust, compliant reconciliation and reporting processes if they want to avoid a similar fate.

Kani Payments specializes in enabling clients to experience enhanced and accelerated transaction reconciliation, payment and settlement reporting, merchant settlements, and client fund safeguarding through our SaaS platform. Our platform enables clients to gain complete visibility into every single record that makes up the daily account balance for safeguarding, including daily account balances, total credits and debits to client accounts, funds that need to be safeguarded, and any changes to client balances.