The recent collapse of Synapse Financial Technologies, a pioneer in the banking-as-a-service sector, has raised significant concerns about the stability of digital banking and the security of millions of fintech deposits. Tens of thousands of customers have already lost access to over $114 million of their funds, and the situation could worsen, affecting up to 20 million depositors.
U.S. Bankruptcy Court Judge Martin R. Barash, during an emergency hearing, highlighted the gravity of the situation. “What we’re really looking at with the meltdown of this company (Synapse), and it is melting down – there was a purchase that didn’t go through, it’s almost out of cash – is a situation where tens of millions of people do not have access to potentially hundreds of millions of dollars of their deposits,” he stated, urging federal bank regulators to intervene.
Synapse’s Fall: From Chapter 11 to Chapter 7
Synapse, based in San Francisco, filed for Chapter 11 bankruptcy in late April. The company, which operates by connecting fintechs to traditional banks, had its operating assets slated for purchase by payment processor TabaPay. However, the $9.7 million deal fell through, propelling Synapse towards Chapter 7 liquidation. This shift will place the company’s dissolution under the management of the United States Trustee, part of the Department of Justice.
One of Synapse’s bank partners, Evolve Bank & Trust, froze consumer deposits this past weekend, impacting fintechs serviced by Synapse, including Yotta Technologies. This action left tens of thousands of customers without access to their funds. Michael Gottfried, a lawyer representing Yotta, described the situation as “heartbreaking,” citing numerous customer complaints about being unable to access their money for essentials like groceries.
The Human Toll: Stories from Affected Customers
Adam Moelis, CEO and co-founder of Yotta, emphasized their commitment to resolving the issue. “Our number one priority is getting customers access to their funds, which are held at member FDIC banks through Synapse Brokerage,” he said. Moelis criticized Evolve Bank for freezing debit and credit card processing without notice and assured that efforts were underway to restore access to funds.
Among the affected customers is Mark Egidi, a 39-year-old mechanic from Phoenix. He switched his direct deposit to Yotta for its gamified savings rewards and FDIC insurance. Now, with an 11-month-old child, recent hand surgery, and no access to his funds, Egidi faces severe financial strain. “At this moment in time, it is absolutely every penny that I have,” he told Forbes.
Compliance and Accountability Issues
Evolve Bank justified its drastic action, stating that it lost access to a Synapse dashboard necessary for compliance screens and determining individual fintech customer balances. “We cannot release funds to people that we do not know they belong to or that we have not ensured have been fully screened for compliance with sanctions laws and anti-money laundering requirements,” explained Evolve’s lawyer, Caroline Stapleton.
Synapse General Counsel Tracey Guerin countered that Evolve had regained dashboard access since Monday and had been unresponsive until just before the hearing. Judge Barash, however, focused on finding a solution to liquidate Synapse without jeopardizing millions of depositors.
There's a saying in Fintech:
You either die a consumer goods company, or live long enough to see yourself enter financial services.
One company has managed to do both.
Let me tell you why Starbucks is one of the most successful banks in the U.S.: pic.twitter.com/yJUAxvBlvl
— Alex Johnson (@AlexH_Johnson) September 2, 2022
Industry-Wide Implications
The failure of Synapse underscores the need for greater oversight in the fintech industry. Some Treasury and Consumer Financial Protection Bureau officials have already called for increased regulation. Traditional banks involved in fintech partnerships have faced regulatory actions for loose oversight.
Despite these challenges, banking-as-a-service remains an attractive business model. FIS, a major financial technology firm, recently launched a new platform, Atelio, to help regional banks offer modernized financial products.
Synapse, founded in 2014, once boasted a valuation of $180 million but has faced persistent management and operational issues. The company’s financial woes culminated in the failed acquisition by TabaPay and a dire cash situation, prompting bankruptcy attorney Ron Bender to declare, “There would be no point in staying in Chapter 11 unless we had a viable purchase offer or funding option because the estate has no money.”
Urgent Actions Needed
As Synapse nears its Chapter 7 liquidation, immediate measures are crucial to safeguard the funds of millions of fintech depositors. Judge Barash has called on the trustee’s office and financial regulators to devise a plan that ensures continued access to necessary software for bank partners.
“This is a potential disaster,” Barash warned. “At least 10 million or 20 million end users, you should think of them as depositors.” The fintech industry, despite its innovations, now faces a critical test of trust and reliability.
The unfolding situation at Synapse Financial Technologies highlights the vulnerabilities within the burgeoning digital banking sector. As regulators and industry stakeholders work to address these challenges, the priority remains clear: protecting the financial security of everyday consumers who have placed their trust in fintech solutions.
