Teen-focused fintech Copper was forced to abruptly terminate its bank deposit accounts and debit card services this month, reflecting the impact felt by the collapse of banking-as-a-service provider Synapse.

In a recent letter to Copper customers, Eddie Behringer, co-founder and CEO of Copper, said the fintech opted to discontinue those services because the banking middleware service Copper uses was “sunsetting their service imminently. Despite our prior planning, this event has forced us to close banking accounts much sooner than anticipated.”

“Going forward, we will continue our mission by offering our same family banking product in partnership with trusted large banks across America,” Behringer wrote May 12. “This strategic decision allows us to remove subscription plan & cost barriers for our members by offering Copper accounts to kids, teens, young adults, and families for free,” he added. 

While certain Copper services were offered through Synapse, Copper-branded debit cards are issued by Evolve Bank & Trust, the fintech’s website said.

Copper’s announcement is among the latest developments in a string of events since TabaPay said it was acquiring Synapse last month.

TabaPay, a money movement platform, offered a purchase price of $9.7 million to acquire Synapse's assets, while the fintech applied for Chapter 11 bankruptcy on April 22. Synapse listed around 50-99 creditors, estimated assets at roughly $10,000,001 – $50 million, and estimated liabilities at around $10,000,001 – $50 million.

TabaPay backed out of the deal within a few weeks “based on failure to meet the purchase agreement closing conditions,” a TabaPay spokesperson told Banking Dive earlier this month.

The closing conditions required Synapse's banking partner, Evolve, to fully fund the “for benefit of” accounts, but the bank failed to do so, Synapse CEO Sankaet Pathak told Banking Dive via LinkedIn message earlier this month.

However, an Evolve spokesperson refuted the claims, saying the bank had no closing conditions to meet.

“Evolve was not party to TabaPay's agreement with Synapse, and we did not have closing conditions to meet. We did have a settlement agreement with Synapse that had a funding condition. Evolve satisfied that condition,” the Evolve spokesperson said via email.

Copper's abrupt discontinuation of its bank accounts and debit cards has left some of its customers unable to access their funds. However, the fintech is coordinating with banking partners AMG National Trust Bank and Synapse to return customers' money as early as possible, Behringer told TechCrunch.

Upon learning the Synapse-TabaPay deal was in trouble, Behringer said Copper began refunding customer funds — leaving only a small, single-digit percentage of customers who did not receive their money back before Copper's services were terminated, according to the publication.

Last week, a bankruptcy judge appointed Jelena McWilliams, a managing partner at law firm Cravath, Swaine & Moore and former chair of the Federal Deposit Insurance Corp., to serve as the Chapter 11 trustee in Synapse's bankruptcy case. Creditors are also pushing to convert the case to Chapter 7, which would help liquidate the company.

“The trustee can immediately start speaking to parties in interest and developing a plan to fund the continued preservation of Synapse's systems and data, and to continue the process of sharing information and hopefully reaching some agreement with the participating banks that allows funds to be returned to end users, to the rightful owners of those funds, as soon as humanly possible,” Judge Martin Barash of the U.S. Bankruptcy Court for the Central District of California noted during a hearing related to the appointment.

The court will hold a Chapter 11 status conference on June 7, according to the court order.

What happens next?

Companies like Synapse have long been the bridge between a fintech firm and a bank, operating to ensure customer accounts were credited and debited correctly.

The customers impacted by Synapse belong to various fintechs like Yotta, Juno, and Copper, whose funds were either pooled in shared accounts at Evolve or held in sweep accounts facilitated by Synapse Brokerage, Michele Alt, founder and partner at Klaros Group explained in an email.

“How their funds are treated - and whether they are covered by insurance – depends,” Alt noted.

Since fintechs are not banks, they are not insured by the FDIC and are not regulated by either the Federal Reserve or the FDIC. Additionally, since none of the banks Synapse partners with, including American Bank, N.A., AMG National Trust and Lineage Bank have failed, the FDIC cannot intervene or pay the harmed customers.

Though funds at Evolve are FDIC-insured, it’s still an operating bank and not a failed institution. But many end users whose funds have been frozen at Evolve feel that the advertising and disclosures related to FDIC insurance were misleading, Alt pointed out.

“It’s understandable that they would read ‘FDIC-insured’ to mean ‘absolutely guaranteed.’ But that is not what FDIC-insured means,” she said.

Evolve maintains that it cannot release the frozen funds because it needs more information to verify the customers’ claims, according to Alt. She noted that customers could either complain to the Fed, Evolve’s federal prudential supervisor, the CFPB, or the state agency that licensed the fintechs (like Copper) that deposited the money on their behalf at Evolve.

Ultimately, it’s up to the bankruptcy court and the regulators to settle the case, Alt said. She expects the Fed is monitoring the situation closely although it does not mediate claims among creditors in bankruptcy.

“There may eventually be enforcement orders – from the Fed and/or CFPB – arising from this situation. Those enforcement orders could involve restitution for the customers. But that will likely take months if not years,” Alt said.