Last 12 months, the fintech startup world – the star of the enterprise capital boom of 2021 – began to crumble as VC funding declined. We’re entering mid-2024 and much of the sector is just a mess today, especially in the banking-as-a-service space, which satirically experts said was the sweet spot last 12 months.
The bankruptcy of banking-as-a-service (BaaS) fintech company Synapse is perhaps the most dramatic thing happening straight away. While this is definitely not all bad news, it does show how dangerous situations can be in the often interdependent world of fintech when one of the key players gets into trouble.
Synapse’s problems harmed and collapsed a whole host of other startups and affected consumers across the country.
To recap: 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 1099 multi-contractor corporations used Synapse to offer quick payments functionality; others used it to supply specialized credit/debit cards. It provided this kind of service as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury.
Synapse has raised a total of just over $50 million in enterprise capital over its lifetime, including a $33 million Series B raise in 2019 led by Angela Strange of Andreessen Horowitz. In 2023, the startup floundered as a result of layoffs and filed for Chapter 11 in April of this 12 months, hoping to sell its assets in a $9.7 million sale to a different fintech, TabaPay. But TabaPay went. It’s not entirely clear why. Synapse blamed Evolve, in addition to Mercury, each of whom raised their hands and told TechCrunch they weren’t responsible. After responding, Synapse CEO and co-founder Sankaet Pathak not responded to our requests for comment.
As a result, Synapse is now on the verge of complete Chapter 7 liquidation, and many other fintechs and their clients are paying the price for Synapse’s demise.
For example, on May 13, teenage banking startup Copper, a Synapse client, needed to abruptly stop maintaining deposit accounts and debit cards as a results of Synapse’s difficulties. This leaves an unknown variety of consumers, mostly families, without access to the funds they have trusted deposited into their Copper accounts.
For its part, Copper says it’s still in business and has one other product, financial education app Earn, that is unaffected and doing well. Still, it’s currently working to pivot its business toward a white-label family banking product, partnering with other, as yet unnamed, larger U.S. banks that it hopes to launch later this 12 months.
CNBC reported that the collapse of Synapse also affected crypto app Juno’s funds. Maryland teacher Chris Buckler said in a May 21 filing that he was blocked from accessing funds held by Juno because of issues related to Synapse’s bankruptcy.
“I’m getting more and more desperate and I don’t know where to turn,” Bucker wrote, in accordance with the website CNBC. “I have almost $38,000 blocked due to transaction processing being suspended. It took years to save that money.”
Meanwhile, Mainvest, a fintech lender for restaurant businesses, actually is turning off as a results of Synapse mess. An unknown variety of staff there lose their jobs. On its website, the company said: “Unfortunately, after examining all available alternatives, a combination of internal and external factors has led us to make the difficult decision to discontinue Mainvest and dissolve the company.”
Synapse documents show that the company’s collapse could have impacted as many as 100 fintechs and 10 million end customers, industry observer and Fintech Business Weekly creator Jason Mikula estimated in a statement to TechCrunch.
“However, this may underestimate the total damage,” he added, “because some of these clients deal with small business payroll, for example.”
The long-term negative and severe impact of what happened at Synapse will be significant “on all fintech, especially consumer-facing services,” Mikula told TechCrunch.
“While regulators do not have direct jurisdiction over middleware providers, which include companies such as Unit, Synctera and Treasury Prime, they may exercise authority over their banking partners,” Mikula added. “I would expect to see greater attention to ongoing due diligence on the financial health of these types of middleware vendors, none of which are profitable, and greater focus on business continuity and operational resilience for banks engaged in BaaS operating models.”
Perhaps not all BaaS corporations should be lumped together. This is what Peter Hazlehurst, founder and CEO of fellow BaaS startup Synctera, is quick to indicate.
“There are mature businesses with legitimate use cases, operated by companies like ours and Unit, but the damage from some of the fallout you report on is only now coming to fruition,” he told TechCrunch. “Unfortunately, the problems that many people are currently facing were written into the platforms several years ago and have become more severe over time, although they were not visible until the last minute when everything collapsed at once.”
Hazlehurst says the early movers made some classic Silicon Valley mistakes: People with computer engineering skills desired to “disrupt” the old and shoddy banking system without fully understanding it.
“When I left Uber and founded Syncter, it became very clear to me that the early players in the BaaS space were building their platforms as quick solutions to tap into the neo/challenger banking “trend,” without actually understanding how one can run it. programs and their associated risks,” said Peter Hazlehurst.
“Banking and finance of all kinds is serious business. Building and running requires both skill and wisdom. There is a reason that regulators exist to protect consumers from such ill effects,” he adds.
He also says that during these exciting beginnings, banking partners – those that should have known higher – didn’t play a supportive role in the choice of fintech partners. “Working with these players seemed like a really exciting opportunity to ‘grow’ their business, and they trusted blindly.”
To be fair, BaaS players and the neobanks that rely on them aren’t the only ones in trouble. We consistently receive news reports about how banks are being scrutinized in terms of their relationships with BaaS providers and fintechs. For example, the FDIC became “concerned” that Choice Bank “opened … accounts in legally risky countries” on behalf of digital banking startup Mercury, in accordance with a report prepared by information. Officials also reportedly chastised Choice for allowing foreign Mercury customers to “open thousands of accounts using questionable methods to prove they have a U.S. presence.”
Healy Jones of Kruze Consulting believes that the Synapse situation won’t pose a problem for the startup community in the future. However, he believes that regulatory transparency is needed to guard consumers.
The FDIC must “provide clear language about what is and is not covered by FDIC insurance at a neobank that uses a third-party bank,” he said. “This will help maintain peace in the neo-banking sector,” he said.
As Gartner analyst Agustin Rubini told TechCrunch: “The Synapse case highlights the need for fintech corporations to take care of high operational and compliance standards. As middleware providers, they need to ensure accurate financial record keeping and transparent operations.
From my perspective, as someone who has been covering the ups and downs of fintech for years, I do not think all BaaS players are doomed. However, I imagine that this case, combined with all the increased scrutiny, may make banks (each traditional and fintech) more reluctant to work with a BaaS player, opting as a substitute to determine direct relationships with banks, because it hopes Copper.
Banking is highly regulated and highly complex, and when Silicon Valley players make a mistake, abnormal people get hurt.
The rush to lift capital in 2020 and 2021 led to many fintechs moving quickly, in part to satisfy hungry investors eager for growth at all costs. Unfortunately, fintech is an area where corporations cannot move so quickly as to chop corners, especially people who shirk compliance. The final result, as we see with Synapse, can be disastrous.
With funding already tight in the fintech sector, it is very likely that the Synapse failure will impact future fintech fundraising prospects, especially for banking-as-a-service corporations. The fears that one other crash will occur are real and, let’s face it, justified.