Reconciliations: The Key to Unlocking the Synapse Case

By Aaron Holmes, Founder and CEO, Kani Payments

The collapse of US Banking-as-a-Service (BaaS) provider Synapse highlights the fundamental importance of accurate reconciliations based on standardised data, and how those reconciliations can impact customer fund safeguarding.

As investigators untangle a complex web of transactions, operational failures, and locate millions of dollars in missing customer funds, this unfortunate case illustrates the complexities of today’s payments ecosystem – and why reconciliations go to the heart of the case.

In a nutshell, Synapse acted as the BaaS intermediary enabling customer-facing fintechs to take end-customer deposits 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 across 100,000 customers had gone missing. Many fintechs and their end customers have been left unable to access funds held on the Synapse platform to pay essential bills or living expenses. In some cases, business owners have been unable to pay staff or suppliers.

With legal hearings rumbling on, we can look to public documents and sworn court testimonies to glean an insight into what happened. After all, it’s important to unpack what went wrong if other banks and fintechs want to avoid a similar fate.

What caused the Synapse meltdown – and why reconciliations are at the core

Investigations have so far revealed significant failings, including the shocking allegation that Synapse did not maintain an accurate ledger or conduct full and accurate reconciliations, leading to incorrect customer fund balances.

Bankruptcy trustees have since declared that recovering and returning customer funds is delayed because of inadequacies with Synapse’s transaction reconciliations. While some partner banks have located and distributed funds held in demand deposit accounts (DDAs), reconciling and returning funds held in ‘for benefit of’ (FBO) accounts is causing major headaches. Following the money in the Synapse case will now require forensic investigation, at great time and cost for all involved.

Just some of the reconciliation challenges identified are:

• Synapse placed fintechs’ customer funds across several banks, meaning a single end user had balances at several institutions, making reconciliations more complicated.
• Synapse’s ledgers and records are either inaccurate or inaccessible, so fund movements can’t be reconciled accurately.
• Interbank transfers made by Synapse were not specifically allocated to end users or partner clients.

Customer fund safeguarding failures: regulators are on high alert

Sworn court testimony from Synapse’s former CEO revealed they also co-mingled funds from its fintech clients and their customers with its own parent and subsidiary accounts, making reconciliations even more difficult and jeopardising the safety of customers’ funds. The result? Investigators don’t know where the missing funds are, which transactions were involved, and which customers need restitution.

Customer fund safeguarding depends on accurate reconciliations. Without accurate data to reconcile transactions and calculate customers’ account balances, fintechs cannot know for certain where customer funds are and what needs to be segregated in a separate account. And regulators are in no mood to show leniency: earlier this year, the UK’s Financial Conduct Authority (FCA) stated it was actively assessing safeguarding processes at in-scope businesses.

While the FCA expects firms to ensure ‘appropriate organisational arrangements’ are in place to safeguard customer funds, there is no standardised or uniform guidance on implementation. It is left to firms to interpret what their organisational arrangements should be, adding pressure on already-stretched in-house finance teams.

Under FCA requirements, fintechs have an obligation to protect funds received in exchange for electronic money issued to customers. That means keeping funds segregated in an account designated only for that purpose. Fintechs also need to ensure that segregated funds are not mixed with funds belonging to other parties.

It should be standard business practice for safeguarding account reconciliations to be done daily. Accurate reconciliations should give a daily compliance balance or control total of zero. But without accurate reconciliation data, many fintechs will be oblivious to errors or suspicious transactions that need urgent attention.

The complex BaaS ecosystem: more challenges in reconciliations

As the Synapse case rumbles on, the BaaS business model has come under intense scrutiny. When each entity has a different account, ledger or sub-ledger, differing reconciliation process and its own way of handling transaction data, it’s easy to see how quickly things can go wrong. But one bad apple shouldn’t spoil the whole barrel. The BaaS model no doubt still has a strong future, but, much like other finance sectors, it must develop reconciliation and reporting processes that offer sufficient protection for end customers.

Understanding the Synapse saga starts with understanding the inherent complexities of the BaaS ecosystem. Issues arise because of the various payment methods and financial institutions involved. It’s challenging to track liquidity and cash flow when settlement timeframes are dictated by whether the payment method is a debit card, credit card, bank transfer or batch payment. Then there’s the fact that transaction processors have their own ways of parsing data – some use XML, some use CSV, some use JSON. There is no uniform, standardised data format. Ultimately, there’s no way to track and manage these funds effectively without the ability to standardise and reconcile data across multiple sources.

While reconciliation is often seen as a necessary back-office burden, the recent Synapse case shows that it’s a mission-critical control step that makes the difference between survival and failure. It should serve as a much-needed warning for businesses to develop robust, compliance-ready reconciliation and reporting processes if they want to avoid a similar fate.

Kani Payments specialises in empowering clients with enhanced and accelerated transaction reconciliation, payment and regulatory scheme reporting, merchant settlement and customer fund safeguarding through our SaaS platform. Our platform enables clients to get full visibility on every single record that makes up the daily safeguarding account balance, including daily account balances, total customer account credits and debits, funds which need safeguarding, and any changes in customer balances.