Last year, the world of fintech startups — star of the heyday of venture capital in 2021 — began to collapse as venture capital funding became more limited. As we approach mid-2024, large swaths of the industry are now in a complete mess, particularly the banking-as-a-service (BaaS) sector, which ironically, Last year, experts told us that was the positive.
The bankruptcy of fintech BaaS Synapse is perhaps the most dramatic event of the moment. While it is certainly not the only bad news, it shows how perilous things can be for the often interdependent fintech world when a key player runs into trouble.
Synapse’s troubles have hurt many other startups and affected consumers across the country.
To recap: San Francisco-based Synapse operated a service that allowed others (primarily fintechs) to integrate banking services into their offerings. For example, a software provider specializing in payroll management for 1099-heavy companies used Synapse to provide an instant-pay feature; others used it to offer specialized credit/debit cards. Until last year, for example, it provided such services as an intermediary between banking partner Evolve Bank & Trust and investment banking startup Mercury, until Evolve and Mercury decided work directly with each other and eliminate Synapse as an intermediary.
Synapse has raised a total of just over $50 million in venture capital over its lifetime, including a seed round in 2019. $33 million Series B fundraising led by Angela Strange of Andreessen Horowitz. The startup faltered in 2023 with layoffs And filed for chapter 11 in April this year, hoping to sell its assets in a $9.7 million fire sale to another fintech, TabaPay. TabaPay has worked. It’s unclear why. Synapse has blamed Evolve and Mercury, both of whom have raised their hands and told TechCrunch they weren’t responsible. After responding, Synapse CEO and co-founder Sankaet Pathak has stopped responding to requests for comment.
But the result is that Synapse is now on the verge of being forced to liquidate entirely under Chapter 7 and many other fintechs and their customers are paying the price for Synapse’s demise.
For example, teen banking startup Copper, a Synapse customer, had to abruptly discontinue bank deposit accounts and debit cards on May 13, due to Synapse’s difficulties. This leaves an unknown number of consumers, mostly families, without access to funds they had deposited in trust in Copper accounts.
Copper, for its part, says it is still operational and has another product, its financial education app Earn, which is unaffected and doing well. However, it is currently working to evolve its business into a white-label family banking product in partnership with other major U.S. banks, which it hopes to launch later this year.
Crypto app Juno’s funds were also affected by Synapse’s collapse, CNBC reported. A Maryland teacher named Chris Buckler said in a May 21 filing that he was unable to access his funds held by Juno due to issues surrounding Synapse’s bankruptcy,
“I am becoming more and more desperate and do not know where to turn,” Bucker wrote, as reported CNBC“I have almost $38,000 tied up because of the shutdown of transaction processing. It took me years to save this money.”
Meanwhile, Mainvest, a fintech lender to restaurant businesses, is actually close Due to the difficult situation at Synapse, an unknown number of employees have lost their jobs. On its website, the company stated: “Unfortunately, after exploring all available alternatives, a combination of internal and external factors has led us to the difficult decision to cease operations of Mainvest and dissolve the company.”
According to Synapse’s filings, as many as 100 fintechs and 10 million end customers could have been affected by the company’s collapse, industry observer and Fintech Business Weekly author Jason Mikula estimated in a statement to TechCrunch.
“But that may underestimate the extent of the damage,” he added, “because some of these customers are in the payroll business for small businesses.”
The long-term, severe negative impact of what happened at Synapse will be significant “across all of fintech, especially consumer-facing services,” Mikula told TechCrunch.
“While regulators do not have direct jurisdiction over middleware vendors, which include companies like Unit, Synctera and Treasury Prime, they can “Banks are exerting power over their banking partners,” Mikula added. “I expect to see increased focus on ongoing financial due diligence of these types of middleware providers, none of which are profitable, and increased focus on business continuity and operational resilience for banks engaged in BaaS operating models.”
Perhaps not all BaaS companies should be lumped together, as Peter Hazlehurst, founder and CEO of another BaaS startup, Synctera, was quick to point out.
“There are mature businesses with legitimate use cases that are served by companies like ours and Unit, but the damage from some of the fallout you’re talking about is only now rearing its ugly head,” he told TechCrunch. “Unfortunately, the problems many people are experiencing today were built into the platforms years ago and have been compounded over time, not being visible until the last minute when everything falls apart at once.”
Hazlehurst says some classic Silicon Valley mistakes were made by early movers: people with computer engineering backgrounds wanted to “disrupt” the old, cumbersome banking system without fully understanding it.
“When I left Uber and founded Synctera, it became very clear to me that the early players in the ‘BaaS’ space built their platforms as quick fixes to exploit a neo/challenger banking ‘trend’ without a real understanding of how to manage the programs and the risks involved,” Hazlehurst said.
“Banking and finance, whatever it may be, is a serious business. It requires both skill and wisdom to set up and run. There are regulators that protect consumers from negative outcomes like this for good reason,” he adds.
He adds that in those heady times, banking partners – who should have known better – were not playing a supportive role in choosing fintech partners. “Working with these players seemed like a really exciting opportunity to ‘scale’ their business, and they trusted them blindly.”
To be fair, it’s not just BaaS players and the neobanks that rely on them that are in trouble. We see constant reports about how banks are being scrutinized for their relationships with BaaS providers and fintechs. For example, the FDIC was “concerned” that Choice Bank “opened… accounts in legally risky countries” on behalf of Digital banking startup Mercuryaccording to a report by The informationAuthorities also reportedly reprimanded Choice for letting Mercury’s foreign customers “open thousands of accounts using questionable methods to prove they were present in the United States.”
Healy Jones of Kruze Consulting believes that Synapse’s situation will no longer be a “problem” for the startup community in the future. But he believes regulatory clarity for consumer protection is needed.
The FDIC should “clearly spell out what is and isn’t covered by FDIC insurance in a neobank that uses a third-party bank on the back end,” he said. “That will help calm the neobank industry.”
As Gartner analyst Agustin Rubini told TechCrunch: “The Synapse case underscores the need for fintech companies to maintain high operational and compliance standards. As middleware providers, they must ensure accurate financial record keeping and transparent operations.”
From my perspective, as someone who has covered the ups and downs of fintech for years, I don’t think all BaaS players are doomed. But I do think this situation, combined with all the increased scrutiny, could make banks (both traditional and fintech) more hesitant to work with a BaaS player, choosing instead to establish direct relationships with banks as Copper hopes to do.
The banking industry is highly regulated and extremely complex, and when Silicon Valley players make mistakes, ordinary human beings suffer.
The rush with which fintech companies deployed capital in 2020 and 2021 pushed many companies to move quickly, in part to satisfy investors hungry for growth at all costs. Unfortunately, fintech is an area where companies can’t move so quickly that they have to take shortcuts, especially those that avoid compliance. The end result, as we’re seeing in Synapse’s case, can be disastrous.
With the fintech sector already experiencing a funding crunch, it is very likely that the Synapse debacle will impact future fundraising prospects in the fintech sector, particularly for banking services companies. Fears of another collapse are real and, let’s face it, justified.
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