QED Investor’s Gerety Says BaaS Model May Be Stronger Without Synapse

The Synapse bankruptcy saga continues to rock the BaaS world, marked by last week’s revelation of $85 million in missing funds. The plot thickened last week when former CEO Sankaet Pathak disclosed in bankruptcy court that funds were commingled, leaving the task of determining rightful ownership and the timeline for restitution a daunting challenge. There’s no money, at least at the moment, to hire a forensic accountant.

Amias Gerety, a partner at QED Investors, shared his insights on the case recently with PYMNTS CEO Karen Webster in the “What’s Next in Payments” series, emphasizing that the issues at Synapse were evident long before the current crisis. “If something serious has gone wrong, it’s because many different things went wrong first,” Gerety remarked, echoing a lesson he imparts to his children.

Despite the turmoil, Gerety cautioned against viewing this as a systemic failure of banking or FinTech sectors. Instead, he likened the situation to a broken ATM — eventually, things will be set right. Gerety expressed confidence in bankruptcy trustee Jelena McWilliams, formerly of the FDIC, to recover a significant portion of what is owed to customers and creditors by meticulously tracing the chain of liability.

At the heart of the Synapse saga is a tale of operational issues — systems did not do what they were designed to do.  Then there’s the fraud question, which has yet to be answered: was an individual or group of individuals in effect lying about or pilfering other people’s funds? And structural issues are also reflected in the $85 million that’s been so difficult to pinpoint.

“If you want your business to survive, you have to figure all this out,” said Gerety. The FinTechs involved in the case — such as neobanks Copper and Juno — are following the money to see if they can stay in business. Evolve and other banks in the case have $180 million in cash invested.

“That’s a big gap,” said Gerety. He noted that 66 cents on the proverbial dollar is a significant amount, but the more important question is finding out where the money is being kept. It’s still common practice in the banking-as-a-service space for those platforms to have only one account at the bank they’ve partnered with. Subledgers bring cash to and from end customers’ accounts.

Other firms, such as Treasury Prime, where Gerety sits on the board, make sure that every FinTech that works with a bank has an FBO account dedicated to that FinTech with that bank. There’s no possibility of commingling funds at this Synapse competitor.

“We keep deposit type accounts,” said Gerety, “that are passed through to the bank and that are separate from payment and settlement accounts. This is very messy and it’s not good for the industry … but for those of us who have been paying close attention, the news that Synapse is going out of business comes as a relief.”

The result, he believes, is that we’ll see the consolidation of stronger BaaS players, and regulators are going to step in to clarify new structures and operational mandates for banks, FinTechs and middleware firms.

Warning Signs

There were some warning signs that all was not right at Synapse, he said. Nearly two years ago, reports surfaced that there was roughly $13 million in what he termed “reconciliation challenges” tied to FBO accounts that held customer funds at Evolve. However, former FDIC chair Jelena McWilliams told the Synapse bankruptcy hearing on June 7 that the exact amount of the Evolve-Synapse reconciliation issues is not clear, and could be much higher.

“Why wasn’t this flagged as an issue? Where was the board?” Gerety asked rhetorically? “Where were the investors? Where was the CFO saying, ‘hey, wait, there’s something here we need to address’?”

“It’s very clear in hindsight that Synapse was not executing on its duty to reconcile dollars.”  There were, in addition, lawsuits stretching back to 2019 against Pathak alleging discrimination and harassment. “Now, that’s not related to reconciliation,” he told Webster, “But, boy that sounds like a company that’s not well-run. Reconciliation is not optional. You are dealing with other people’s money, and that carries with it what should be a sacrosanct obligation to know where that money is, at least at the end of every day.”

None of that’s to say that doing so is a simple endeavor. Payments, of course, are complicated, and different payments — debit, credit, ACH — operate on different timeframes in terms of settlements (and chargebacks muddy the picture). There can be fraud in the mix too.

“And that means you’ve got to chase it down,” said Gerety, who added that “it may take a day, or two days — but you’ve got to know, to the penny, what dollars are being chased at all times.”

The $13 million in unreconciled accounts, he said, showed that Synapse’s claims about “auto reconciliation” were faulty.  They were enough to spur Gerety to approach management at Treasury Prime to ask whether the same glitches might be waiting for that company. Turns out that Treasury Prime’s own systems were, and are, set up so that any reconciliation or operational issues are immediately flagged … all the way up to the CEO. The system has not changed even though Treasury Prime has moved to a more direct model, partnering with banks to help them serve FinTechs rather than acting as a middleman between banks and FinTechs.

“I hope we find some middle ground in terms of expectations … especially around fund segregation, account keeping and data flows,” he said of the inevitable meetings between regulators, FinTechs and banks. “And we’ll make these best practices … this will actually increase the confidence of both banks and FinTechs coming into the market, which will make everything better.”

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