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Senators Demand Action to Restore Customer Money

A group of senators has joined forces to demand the immediate restoration of customer access to their funds following the collapse of Synapse, a banking-as-a-service startup. The senators, led by Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, have issued a public letter demanding action from Synapse's owners, bank and fintech partners.

• The senators have specifically called out Synapse's investors, including Andreessen Horowitz, Core Innovation Capital, and Trinity Ventures, as well as the company's principal bank and fintech partners, including Evolve Bank & Trust, Mercury, and Copper, among others.
• The senators argue that all parties involved, including investors, are responsible for ensuring the safety and accessibility of customer funds, and should collectively work towards making all frozen deposits immediately available.

Customers Frozen Out of Their Money

The situation has left customers of companies that partnered with Synapse unable to access their money since mid-May. The senators emphasize that consumers were led to believe that fintech products were safe and reliable alternatives to banks, and that venture capital firms backed Synapse without demanding adequate controls to protect consumer funds. They point out that banks also partnered with Synapse to find new revenue streams, further contributing to the misleading marketing of Synapse's services.

• The letter highlights the potential shortfall of $65 to $96 million between what consumers are owed and the funds held by Synapse's partner banks, which the senators call "deeply troubling and completely unacceptable."
• They stress that restoring customer access to their money is the immediate priority, while investigations into who bears ultimate responsibility will follow.

Synapse's Chapter 11 Bankruptcy

Synapse, a San Francisco-based startup, provided a service allowing other companies, primarily fintechs, to embed banking services into their offerings. The company had raised over $50 million in venture capital, including a $33 million Series B round led by Andreessen Horowitz. However, Synapse faced challenges in 2023, resulting in layoffs and eventually filing for Chapter 11 bankruptcy in April. They attempted to sell their assets to another fintech, TabaPay, for $9.7 million, but the deal fell through.

• Following the Chapter 11 filing, a U.S. Trustee pushed for the conversion of the case to Chapter 7 bankruptcy, citing "gross mismanagement" of the estate.
• This move effectively froze customer accounts and triggered the current situation where customers are unable to access their money.

Banking-as-a-Service (BaaS) Model Under Scrutiny

The senators express their concern about the inherent weaknesses of the banking-as-a-service (BaaS) model, arguing that the Synapse collapse has exposed these vulnerabilities. They point out that the tri-party business model, involving fintechs, banks, and platforms like Synapse, has resulted in hardworking Americans and small businesses being deprived of access to their own money.

• The senators urge that the BaaS model needs to be carefully examined and potentially revised to ensure better consumer protection and prevent similar situations from occurring in the future.
• They emphasize the need for strong regulations and oversight of the BaaS model to ensure the safety of customer funds and prevent future failures like the Synapse collapse.

Evolve Bank Data Breach

Further fueling concerns about the BaaS ecosystem, Evolve Bank, a major partner in the BaaS space, recently announced a cyberattack and data breach that may have impacted its partner companies and their customers. This incident has highlighted the risks associated with third-party providers and the potential consequences for customer data security in the BaaS landscape.

• The data breach has raised questions about the security and reliability of BaaS partnerships and the need for stricter security measures and data protection practices.
• The senators' call for action and their critique of the BaaS model are likely to influence the ongoing debate about the future of this emerging industry.