The Collapse of Synapse: A Banking-as-a-Service Crisis

The collapse and bankruptcy of BaaS fintech Synapse has exposed the precarious state of the interconnected fintech ecosystem when a key player falters. Synapse offered services that allowed other fintechs to integrate banking functionalities into their offerings. For instance, companies specializing in payroll or offering specialized credit/debit cards relied on Synapse. The company, which had secured over $50 million in funding, including a $33 million Series B led by Andreessen Horowitz, faced challenges in 2023 with layoffs. By April 2024, Synapse filed for Chapter 11 bankruptcy, attempting to sell its assets to TabaPay for $9.7 million. However, TabaPay withdrew from the deal, leading to Synapse's liquidation under Chapter 7.

• Synapse's collapse impacted numerous fintechs, including Juno, Yotta, and Yieldstreet, and their customers.
• The fallout has raised questions about the viability of the banking-as-a-service concept and digital banking in general, as millions of customers with nearly $160 million in deposits are unable to access their funds.

Timeline of Synapse's Troubles and Impact

The following timeline highlights the events leading to Synapse's collapse and the ongoing impact on banking customers.

2024

• August 22: Synapse's founder, Sankaet Pathak, launches a new robotics startup, Foundation, while millions of dollars in customer funds remain frozen. He also claims that Synapse's partner, Evolve Bank, is responsible for the missing funds.
• July 7: A status conference in the ongoing Synapse bankruptcy offers little hope for customers as efforts to release the remaining $158.6 million in funds appear to be stalling. An estimated $65 to $95 million in funds remains missing.
• July 1: Senators urge Synapse's owners, bank and fintech partners, and venture investors to take immediate action to restore customer access to their funds.
• June 12: Pathak raises $10 million for his new robotics startup despite concerns over the whereabouts of $85 million in missing customer savings from Synapse.
• May 25: Synapse's collapse potentially affects up to 100 fintechs and 10 million end customers. The impact is felt by crypto app Juno, banking platform Yotta, and Mainvest, a fintech lender to restaurants.
• May 16: A US trustee files a motion to convert Synapse's Chapter 11 bankruptcy into a liquidation Chapter 7, citing gross mismanagement and a lack of likelihood for reorganization.
• May 13: Teen banking startup Copper, a Synapse customer, discontinues its banking deposit accounts and debit cards, leaving an unknown number of customers without access to their funds.
• May 9: TabaPay, the company intending to buy Synapse's assets, abandons its plans. Accusations are made against banking partner Evolve Bank, which denies involvement and blames Synapse's CEO.
• April 22: Synapse files for Chapter 11 bankruptcy and announces a planned sale of its assets to TabaPay for $9.7 million, pending bankruptcy court approval.

2023

• October 13: Evolve Bank and digital bank Mercury end their relationships with Synapse and work directly with each other.
• October 6: Synapse confirms layoffs, affecting about 40% of its workforce. The layoffs were attributed to macroeconomic conditions impacting its clients and platforms.

The Impact of Synapse's Collapse on Fintech

The collapse of Synapse has significant implications for the fintech industry and the banking-as-a-service model. It highlights the risks associated with relying on a single provider for essential banking services. The interconnected nature of the fintech ecosystem means that the failure of one player can have cascading effects on others. This incident has raised concerns about the due diligence and oversight practices within the industry.

• The absence of robust safeguards and mechanisms for protecting customer funds in the event of a fintech failure is a major concern.
• The situation underscores the importance of diversification and redundancy in fintech business models to mitigate the impact of failures.

The Search for Solutions: Addressing the Crisis in Fintech Banking

In the wake of the Synapse debacle, there's a growing call for greater transparency and accountability in the fintech space. This includes:

• Strengthening regulations: Establishing stricter regulatory frameworks for fintechs, especially those providing banking-as-a-service, could help to mitigate risks and protect customers.
• Improved risk management: Fintechs should implement robust risk management practices, including thorough due diligence on partners and independent audits to ensure financial stability and customer protection.
• Greater transparency: Fintechs should be transparent about their operations, including their financial health and the risks associated with their products and services.
• Customer protection: Mechanisms should be put in place to protect customer funds in the event of a fintech failure, such as deposit insurance or escrow accounts.

The Future of Banking-as-a-Service

Despite the challenges, the banking-as-a-service model has the potential to bring innovation and efficiency to the financial sector. However, to ensure its sustainability and the protection of consumers, it is essential to address the weaknesses exposed by the Synapse collapse. The industry must prioritize responsible growth, transparency, and robust risk management to restore confidence and build a more resilient fintech ecosystem.

Evolve Bank's Role in the Synapse Collapse

The collapse of Synapse has brought into question the role of Evolve Bank, which acted as a partner and provided banking services to the fintech company. Some accusations have been made against Evolve Bank, including allegations of mishandling customer funds. The situation highlights the importance of ensuring that banking partners have adequate safeguards and oversight mechanisms in place to protect customer interests.

Key Takeaways from the Synapse Collapse

• The interconnectedness of the fintech ecosystem can lead to significant risks. The failure of one player can have far-reaching consequences for others.
• Robust risk management and due diligence are crucial for ensuring financial stability and customer protection in the fintech industry.
• Transparency and accountability are essential for building trust and restoring confidence in the fintech ecosystem.
• The banking-as-a-service model has potential but needs to be implemented with greater responsibility, oversight, and customer protection measures.