Synapse Bankruptcy, A Wake-Up Call for Banking-as-a-Service

"Bankrupt" stamped in red over a traditional marble bank

The recent abrupt bankruptcy filing of financial technology company Synapse has sent shaken the banking industry. Synapse Financial Technologies, which acted as a middleman between fintech firms and banks, has frozen the accounts of tens of thousands of businesses and consumers as a result of its Chapter 11 bankruptcy protection filing in April.

This debacle has put the spotlight on the risks inherent in the banking-as-a-service (BaaS) model that has become increasingly popular in recent years. BaaS allows fintech companies to offer banking services like checking accounts and debit cards to their customers by partnering with licensed banks, without having to obtain a bank charter themselves.

AVOID THE RISK. WORK WITH DIRECTPAYNET

How Synapse’s Collapse Unfolded

Synapse provided the behind-the-scenes plumbing that connected over 100 fintech platforms, including savings app Yotta and business banking provider Mercury, to FDIC-insured partner banks like Tennessee-based Evolve Bank & Trust.

When Synapse abruptly shut down in April, it left banking partners unable to process transactions or verify customer balances.

Bankruptcy court filings paint a picture of missing customer funds and unreliable record-keeping by Synapse. The court-appointed bankruptcy trustee has reported an $85 million shortfall between the cash held in Synapse-linked bank accounts and what customers are owed according to Synapse’s ledgers.

Getting customers access to their frozen funds will likely take weeks if not months as the trustee and partner banks attempt to reconcile the accounts.

Increased Regulatory Scrutiny of BaaS Partnerships

Synapse’s meltdown has attracted the attention of banking regulators and is expected to lead to tighter oversight of bank-fintech partnerships. The Federal Reserve has already penalized Synapse partner Evolve Bank & Trust for “unsafe and unsound practices” in its fintech oversight.

Regulators are concerned that some BaaS arrangements have allowed fintech companies to evade the strict capital and liquidity requirements, consumer protection laws, and anti-money laundering rules that apply to traditional banks. The Office of the Comptroller of the Currency, Federal Reserve, and FDIC have all set up task forces to more closely monitor fintechs that partner with banks.

“Examiners are people,” said Todd Baker, a senior fellow at Columbia University. “It’s going to reinforce whatever concerns they have about the space in general. So, there’re going to be tough examinations, there’s no doubt about it.”

STAY COMPLIANT WITH DIRECTPAYNET

The Future of BaaS

The increased regulatory scrutiny sparked by the Synapse bankruptcy is likely to make banks more cautious about entering into BaaS partnerships and could slow the growth of the BaaS industry. Fintechs may find it harder to convince banks to work with them and give them access to the payment rails and FDIC insurance that make many fintech business models possible.

Some BaaS providers are already pivoting in anticipation of the changing regulatory winds. Treasury Prime, a BaaS platform that connects banks and fintechs, laid off much of its staff earlier this year and announced it would start selling its software directly to banks rather than acting as a middleman.

This “bank-direct” model may become more common as regulators push for simpler, more transparent partnerships.

However, most experts believe BaaS is here to stay in some form given the strong demand from both consumers and financial institutions for more innovative, tech-driven financial services. Banks benefit from BaaS by being able to grow deposits and generate fee income without building consumer-facing brands or technology themselves.

A 2023 PYMNTS survey found that 76% of banks view fintech partnerships as necessary to meet customer expectations.

Protecting Consumers in an Embedded Finance World

The Synapse situation has exposed the risks to consumers when financial services are provided by loosely regulated fintechs rather than directly by banks. Customers of Yotta, Mercury and other Synapse-linked fintechs have been locked out of their accounts and face uncertainty about when they’ll be able to access their money again.

Regulators and lawmakers will likely look to strengthen disclosure requirements and restrictions around how fintechs can describe their financial products to ensure consumers understand whether they are dealing with a bank or a fintech, and what protections they are entitled to. The Consumer Financial Protection Bureau is expected to take a leading role given its power to police fintechs for unfair, deceptive or abusive practices.

“The disorderly failure of Synapse and the impact on end users is likely to confirm policymakers’ and regulators’ worst fears about the operating model and fintech in general,” wrote fintech advisor Jason Mikula.

What’s Next?

Synapse’s filing for Chapter 11 has exposed the risks lurking within the booming BaaS industry and is a harbinger of stricter oversight to come for bank-fintech partnerships.

While demand for BaaS is likely to remain strong, the industry’s growth could slow as regulators push for simpler arrangements and more of the compliance burden shifts to fintechs. Consumers should be aware of the differences between fintechs and fully regulated banks, and what protections they are giving up for the sake of convenience or higher yields.

The Synapse saga won’t be the last failure in this space, but it will hopefully spur changes to make BaaS partnerships more stable and transparent.

SECURE YOUR BAAS BUSINESS WITH DIRECTPAYNET

Comments

15 responses to “Synapse Bankruptcy, A Wake-Up Call for Banking-as-a-Service”

  1. 먹튀검증 Avatar

    먹튀검증으로 토토사이트와 온라인 카지노사이트 먹튀 피해를 예방하는 먹튀검증사이트

  2. 탑머니상 Avatar

    안전을 위해 탑플레이어 머니상 공식 인증 업체를 이용하세요. 

  3. Junius Schoen Avatar

    Admission in a Georgian.University

  4. 탑머니상 Avatar

    빠르고 안전한 탑플레이어 머니상 공식 인증 업체를 이용하세요. 

  5. xvideos red free Avatar

    xvideos.gold, just hd videos, free premium xvideos red

  6. 먹튀검증 Avatar

    빠르고 안전한 먹튀검증 전문 커뮤니티 먹튀감정사를 이용하세요. 

  7. youtube to mp3 Avatar

    My brother suggested I might like this website He was totally right This post actually made my day You cannt imagine just how much time I had spent for this information Thanks

  8. Mossie Wintheiser Avatar

    I appreciate your honesty in this post. It’s refreshing to see someone talk openly about the challenges of remote work. Check out [Asian Drama](https://asiandrama.live/?utm_source=google&utm_medium=search&utm_campaign=promotion) for more real-life experiences.

  9. How Do I Find Hotel Massage Packages Avatar

    First, thank you for the information, and your perspective.

    I could enjoy this blogging site and most importantly this content.
    At this point, Personally i think I squander much
    too much time on the web, browsing rubbish, actually.

    This was a refreshing differ from that experience. Yet, I feel that examining other
    people’s good ideas is a valuable investiture of at least some of my weekly measure of amount of time in my program.

    It’s much like looking through the junk heap
    to discover the gold. Or perhaps, whatever analogy works for you.
    Still, sitting in front of the home computer is most likely as harmful to you as
    smoking and fried chips.

  10. chair massage summit nj Avatar

    People can all reap the benefits of learning more
    about ourself and our overall health and well being. Specific
    actions and animation amounts can possess superb
    gain to us, and all of us have to learn even more info about them.
    Your weblog has presented vital data which is to be helpful to many different
    populations and individuals, and I just appreciate your writing your expertise in this manner.

  11. perinatal massage Avatar

    First, many thanks for the info, and your perspective.
    I can enjoy this weblog and especially this informative article.
    At this point, Personally i think I throw away far too much time on-line,
    scanning rubbish, actually. This was a refreshing differ
    from what I’ve known. Yet, I believe examining
    other people’s good ideas is a valuable investment of at least a few of my weekly allotment of time in my program.
    It’s just like looking through the chaff to get the treasure.
    Or simply, whatever example performs best for you. Still, near the computer is probably as harmful to you as tobacco use and deep-fried
    chips.

  12. trsfcdhf.hfhjf.Hdasgsdfhdshshfsh@forum.annecy-outdoor.com Avatar

    I can’t imagine all the things we concern ourselves with in our
    lives makes a difference. At all times put in thinking about the various things
    that people face each and every moment is usually really important, as no other woman will deal with existence for us.
    Personally I think that people young and old need to be more grounded.

    Science is superb, however, so much of what we think about is so
    abstract. Having a cup of coffee is a zen activity that brings one
    back again to the present minute. We must be more
    in the here and now, without being overwhelmed by life and the crises we confront each day.

  13. Indian Massage Therapy Avatar

    In actuality, the large majority of subject areas are a
    great deal more detailed than some amateur viewer could decide on,
    based upon their position. I’m not saying that am an expert on this idea being outlined, therefore
    I think it’s for different message board users to think of.
    I am absolutely not trying to make difficulties or be unacceptable.
    Rather, I understand from knowledge that
    this can be the instance. I practice Perinatal
    Massage Therapy, and in my very own chosen
    occupation, I notice it very much. Brand-new Postpartum Massage Therapists
    are likely to exaggerate claims; which can be, these people don’t yet genuinely grasp
    the constraints of their particular “scope of practice,” and thus they might probably make
    remarks that are overbroad when communicating with patients.

    It’s the corresponding occurrence; they have been introduced
    to a theme, don’t know the thorough breadth of this, and finally (wrongly) conclude they are the Authorities.

Leave a Reply

Your email address will not be published. Required fields are marked *