A bunch of senators have joined forces to call on Synapse’s owners and its banking and fintech partners to “immediately restore customers’ access to their money.” As a part of their demands, the senators held each the company’s partners and investors responsible for the lack of customer funds.
In a letter made publicly available on Monday, U.S. Senator Sherrod Brown (Democrat of Ohio), chairman of the Senate Banking, Housing and Urban Affairs Committee, along with Senators Ron Wyden (Democrat of Oregon), Tammy Baldwin (Democrat of Wisconsin) and John Fetterman (Democrat of Pennsylvania) noted that customers of firms that have entered into a partnership with the banking startup Synapse have not had access to their money since mid-May.
The letter was addressed to W. Scott Stafford, chairman and CEO of Evolve Bank & Trust, but was also sent to major investors in Synapse, in addition to the company’s major banking and fintech partners. Recipients included former Synapse CEO Sankaet Pathak; enterprise firms Andreessen Horowitz, Core Innovation Capital, and Trinity Ventures; American Bank; AMG National Trust; Trust and Lineage Bank; and fintech firms Copper, Juno, Mercury, Yieldstreet, and Yotta.
San Francisco-based Synapse operated a service that allowed others (mostly fintechs) to embed banking services into their offerings. For example, a software provider specializing in payroll for firms with a large variety of 1099 counterparties used Synapse to provide quick payment functionality; others used it to offer specialized credit/debit cards. Until last 12 months, it provided such services as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, until Evolve and Mercury decided to work directly together and eliminate Synapse as the middleman.
Synapse has raised a little over $50 million in enterprise capital over its lifespan, including a $33 million Series B round in 2019 led by Andreessen Horowitz’s Angela Strange. The startup faltered in 2023 amid layoffs and filed for Chapter 11 bankruptcy in April of this 12 months, hoping to sell its assets in a $9.7 million fire sale to one other fintech, TabaPay. But TabaPay is gone. It’s not entirely clear why. Synapse has put much of the blame on Evolve and Mercury, who have thrown up their hands and told TechCrunch they weren’t responsible. Synapse CEO and cofounder Sankaet Pathak has since declined to respond to requests for comment.
As a result, Synapse was forced to file for Chapter 7 bankruptcy in May, leading to the complete liquidation of the company. Customers have been cut off ever since.
Government representatives didn’t forgive their partners from the financial technology industry, blaming them for the situation.
In their letter, the senators said it is the responsibility of all the different entities – including the enterprise capitalists who support them – to “ensure the security and availability of end-user funds.”
They called on everyone to work together to immediately release all customer deposits frozen as a results of the Synapse bankruptcy.
Specifically, they wrote: “Each of you is responsible for the customers whose accounts were frozen. Consumer-facing fintech companies marketed their products as safe, reliable alternatives to banks. Because of these promises, consumers adopted their products and made deposits through their apps and websites. Venture capital firms funded Synapse without insisting on adequate controls to protect consumers. They were able to profit while Synapse marketed itself as a trustworthy provider of financial infrastructure. However, they failed to ensure that Synapse could fulfill its obligations. Banks joined forces with Synapse to find new sources of revenue. These partnerships also allowed Synapse to market services that banks ultimately provide.”
The senators also expressed concern and concerns about a “potential shortfall of between $65 million and $96 million between the amount owed to consumers and the funds held on their behalf by Synapse’s partner banks,” calling it “deeply disturbing and completely unacceptable.”
They added: “In due course we will know who is ultimately responsible for this mess, but in the meantime the priority must be to restore consumers’ access to their money.”
In their letter, the senators also criticized the banking-as-a-service model as a whole, saying the Synapse bankruptcy “exposed the inherent weaknesses of this three-sided business model and left hard-working Americans and small businesses without access to their own money.”
The past week has been filled with drama in the world of banking as a service. On June 26, Evolve Bank announced that it had been the victim of a cyberattack and data breach that would have affected its partner firms as well. The incident, by companyinvolved “the data and personal information of certain Evolve retail bank customers and customers of financial technology partners,” including Affirm, Mercury, Bilt, Alloy, and Stripe. On June 29, fintech company Wise announced that some of its customers’ personal information may have been stolen in a data breach. Also last week, Thread Bank — a popular partner of BaaS startups like Unit – He get hit by an enforcement motion from the FDIC. Significantly, the order issued to Thread, as a publication Payments emphasized that “it is unique in that it explicitly mentions the bank’s Banking-as-a-Service (BaaS) and Loan-as-a-Service (LaaS) programs.”
TechCrunch reached out to Evolve Bank and former Synapse CEO Sankaet Pathak for comment. Evolve declined to comment.