Synapse, a renowned decade-old fintech firm, has filed for bankruptcy. This has left numerous customers stranded without access to their funds, and has caused major disruptions in the banking sector. Consequently, concerns about the longevity and regulatory compliance of the banking-as-a-service model are rife in the fintech industry. This incident underscores the risk that customers take when they entrust their assets to emerging, online-based financial services.
With a significant amount of money still missing and only fragments of the funds being held by certain U.S banks, the partnerships between venture-backed startups and FDIC-supported banks are being increasingly scrutinised. In light of Synapse’s downfall, authorities are examining the loopholes which allowed such a large amount of money to vanish. This incident highlights the importance of implementing robust financial safeguards, particularly when volatile startups engage with FDIC-insured banks.
Prompted by the Synapse debacle, regulators are encouraging banks to fortify their management systems when partnering with fintech companies. They stress that weak management systems increase risks and potential losses, and call on banks to thoroughly analyse and monitor their relationships with fintech firms. This would serve to mitigate any future threats and uphold their reputation and trustworthiness.
Synapse bankruptcy exposes fintech vulnerabilities
Synapse became prominent after the 2008 financial crisis, innovating traditional operations and offering essential services via a simplified digital platform. With partnerships with FDIC-approved banks, Synapse was able to provide direct access to fintech outfits like Mercury, Dave, and Juno, thereby increasing deposits and fee income for their conventional banking allies. Likewise, their services had attracted nationwide fintech-based customers.
Following unsuccessful discussions with Evolve Bank and Trust, a partner bank, Synapse’s network severed connections with Evolve’s access, freezing customer accounts associated with Evolve and other affiliated banks. This sudden disruption to banking services led to widespread frustration and uncertainty. The nascent crisis sparked a realization of the inherent risks of over-reliance on digital platforms.
In the aftermath of the bankruptcy, strained relations resulted in accusations between Synapse and Evolve Bank and Trust. CEO of Synapse, Sankaet Pathak, claimed that Evolve intentionally slowed down customer fund repayments. Conversely, Evolve’s management refutes these allegations, stating any delays are due to procedural issues resulting from the bankruptcy. Amidst these accusations, customers are left anxious by the uncertainty of the situation. The pledge for resolution remains, despite the complex nature of the predicament and the large number of affected customers.
