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Home » A tangled web with FinTechs, intermediaries and banks
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A tangled web with FinTechs, intermediaries and banks

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In biology, a synapse is essentially a conduit, a place in the brain where neurons connect and communicate.

In financial services, recent news that TabaPay would put an end to its FinTech acquisition project Synapse Financial Technologies evokes another type of connectivity:

The links established between FinTechs, sponsor banks, their efforts to develop banking as a service… and the risks that may be inherent therein.

Here are the details so far:

As reported on Thursday (May 9), and as of this writing, TabaPay, a payment processor, has pulled out of its deal to purchase Synapse, which focuses on banking as a service (BaaS).

Under the terms of the agreement, TabaPay was to pay $9.7 million to acquire Synapse’s assets.

Synapse, for its part, had focused on the role of a middleware company, enabling deposits, credits and virtual cards.

Synapse did it via its platform “hubs” and via a modular approach to BaaS – which allows these clients to operate primarily within the framework of financial services without the need to obtain a banking charter.

The intermediary model connects banks with non-bank entities that want to accept deposits and lend to end customers.

The deal would have enabled TabaPay to offer new financial services to FinTech and traditional financial institutions (FIs).

As a reminder, sponsor banks are banks – operating at the national or federal level – which team up with FinTech partners so that the latter can bring their financial innovations to other companies or the general public.

Evolve Bank and Trust had been provide sponsor bank services at Synapse since 2017. But as shown here this week by TechCrunchthere was a dispute between Synapse and Evolve, who informed Synapse of the intention to end the relationship and work directly with Mercury, a business banking FinTech, rather than using Synapse as an intermediary.

Mercury, one of Synapse’s largest customers, ended its relationship with Synapse, which subsequently laid off 40% of its staff.

Funds under the microscope

One of the final conditions of the TabaPay agreement to buy Synapse, detailed by Fintech Business Weeklywas based on the stipulation that Evolve must fully fund so-called FBO (or “for the benefit of”) accounts that receive funds for third parties. Synapse says Evolve didn’t do it, Evolve says it did, according to reports… and TabaPay walked away, it seems, amid the accusations.

Posts on Medium from the CEO of Synapse Sankaet Pathak allege that Mercury transferred approximately $50 million in FBO funds into Evolve. Synapse’s CEO wrote, along with screenshots, that this “suggests that (Mercury) moved more money than you should have… (This) indicates that you did not have procedures in place appropriate reconciliations”.

The evolution of BaaS — and where are the middlemen?

The machinations and paths as Synapse moves toward bankruptcy are winding and a work in progress. But the events provide a nod to the ever-changing role and pressures placed on “middleware” or intermediary relationships within BaaS.

In an interview with Karen WebsterDrew Webster, CEO of Ingo Payments, said that “BaaS 1.0 was, in some ways, a technology company focused on enabling technology companies. They would build a cloud core and bring together all kinds of third-party providers to manage what we would call financial mobility. But he noted that regulators are now turning their attention to downstream risks associated with know your customer (KYC), compliance and risk management, fraud and financial security of FinTechs and their partners.

We may be seeing a wave of more direct relationships within BaaS, as FinTechs sell directly to banks. Treasury Prime is an example here. The company has already marketed its BaaS platform to FinTechs, helping them connect to banks. Earlier this yearTreasury Prime, which operates a banking-as-a-service platform, laid off about half its staff and focused on selling directly to banks. In the past, its efforts focused on FinTechs. And in this connectivity offering, the company has helped FinTechs and banks come together. Now the company will offer its offerings directly to banks, with traditional financial institutions managing their own FinTech relationships.

BaaS provider changes occur in a context where PYMNTS Intelligence noted that About two-thirds of banks and credit unions have entered into at least one FinTech partnership in the past three years, with 76% of banks viewing FinTech partnerships as necessary to meet customer expectations.

See more in: acquisitions, Baas, banking, Banking as a Service, Developing banking and trust, financial services, Financial Technology, Mercury, News, PYMNTS News, Synapse, Synapse Financial Technologies, TabaPay

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