San Francisco, CA – The collapse of fintech startup Synapse has sent shockwaves through the banking industry, leaving numerous customers stranded without access to their funds and raising questions about millions of dollars that have gone missing.
As the saga of Synapse’s bankruptcy unfolds, it underscores the potential risks inherent in the loose partnerships between venture-backed fintech firms and FDIC-backed lenders. Regulators are now scrutinizing these relationships more closely, urging banks to strengthen their controls when engaging with fintech companies.
Synapse, a pioneering fintech firm established a decade ago, was at the forefront of the wave of new digital banking startups that emerged after the 2008 financial crisis. By offering “banking as a service,” it quickly became a key intermediary between fintech companies like Mercury, Dave, and Juno, and smaller community banks. Through partnerships with these FDIC-backed banks, Synapse facilitated access to checking accounts and debit cards for customers.
Among the small banks that collaborated with Synapse were Evolve Bank & Trust, American Bank, AMG National Trust, and Lineage Bank. Despite their relatively smaller size compared to major banking institutions like JPMorgan Chase or Bank of America, these banks saw the opportunity to attract deposits and generate fee revenue through their partnership with Synapse.
However, complications arose following Synapse’s filing for bankruptcy, particularly in the settlement of funds with Evolve Bank & Trust. The breakdown in negotiations led to a disruption in services, causing Evolve and other partner banks to freeze customer accounts, leaving thousands of customers unable to access their funds.
Accusations flew between Synapse and Evolve, each blaming the other for the crisis. While Evolve alleged that Synapse’s actions had endangered user funds and hindered compliance with regulations, Synapse’s CEO countered by accusing Evolve of delaying the return of customer funds.
The situation escalated further as questions arose about the whereabouts of the missing funds. Court-appointed trustee Jelena McWilliams revealed a significant shortfall, sparking concerns over the fate of millions of dollars belonging to end users.
As regulators sound the alarm on the risks associated with partnerships between fintech firms and traditional banks, the fallout from Synapse’s collapse serves as a cautionary tale. The evolving landscape of digital banking continues to pose challenges for regulators and industry players alike, underscoring the need for enhanced oversight and risk management practices in an increasingly complex financial ecosystem.