What happened to Synapse – Chronicles of a downfall

The bankruptcy of Synapse Financial Technologies has revealed critical weaknesses in the Banking-as-a-Service (BaaS) model. Established to simplify partnerships between fintech firms and banks, Synapse played a key role in enabling account management and transaction processing for its clients.

However, its abrupt Chapter 11 filing in April 2024 disrupted these services, leaving fintech partners and their customers in financial limbo. Over 200,000 accounts were affected, with approximately $85 million in funds unaccounted for.

The collapse has prompted renewed scrutiny of the BaaS framework, raising questions about accountability, oversight, and the sustainability of intermediary-led financial operations.

Left in limbo – Customers and fintechs in crisis

Synapse’s abrupt bankruptcy disrupted financial services for its fintech clients and the thousands of customers who relied on them. Companies like Yotta and Juno, which depended on Synapse to provide essential banking infrastructure, were left scrambling to restore access to frozen accounts. End-users, meanwhile, were unable to access their funds, which for many represented critical savings.

The incident exposed the limitations of the Banking-as-a-Service model, where intermediaries like Synapse handle sensitive financial operations. Fintech partners, while agile in delivering customer-focused innovations, were heavily reliant on Synapse’s operational backbone. When that backbone collapsed, the gaps in their contingency plans became apparent. Customers were left questioning the safety and reliability of fintech platforms, further eroding trust in an already fragile ecosystem.

For fintech companies, the operational challenges extended beyond customer retention. Platforms dependent on Synapse had to urgently seek alternative providers to avoid prolonged service outages, adding significant costs and operational strain.

Partner banks under fire

Beyond the immediate operational disruptions, the bankruptcy has also cast a spotlight on its partner banks, who now face a class-action lawsuit. Institutions like Evolve Bank & Trust, AMG National Trust, American Bank, and Lineage Bank have been accused of negligence in overseeing the funds deposited under their watch. The lawsuit alleges that these banks failed to exercise sufficient due diligence, allowing Synapse to mismanage approximately $85 million in customer funds.

Evolve Bank, in an open letter, defended its practices, stating that its agreements with Synapse limited its ability to oversee the management of funds held under Synapse’s purview. The response has sparked broader questions about the responsibilities of banks in BaaS partnerships. How much oversight should partner banks exercise, and where does liability ultimately lie when intermediaries falter?

The lawsuit is expected to set a critical precedent for the fintech industry, determining whether banks can be held accountable for the failings of their platform partners. The outcome could reshape how contracts between banks and fintech intermediaries are structured, with a likely shift toward stricter oversight clauses and shared compliance responsibilities.

Mind the (regulatory) gaps

The Synapse collapse has highlighted regulatory blind spots in the Banking-as-a-Service model. At the centre of the controversy is the management of “For the Benefit Of” (FBO) accounts. These pooled accounts, controlled by fintech intermediaries like Synapse, lacked the transparency and safeguards that individual account holders might expect. When Synapse failed, the absence of clear protections left customers and partner banks exposed.

In response, the Federal Deposit Insurance Corporation (FDIC) has proposed stricter recordkeeping requirements to ensure that consumer funds remain accessible during intermediary failures. The proposed changes aim to increase transparency between fintech platforms and their partner banks.

Industry experts have noted, however, that these measures, while necessary, do not address the root causes of the Synapse collapse. Beyond technical compliance, the industry needs to rethink the accountability structures underpinning fintech-bank partnerships. Without robust checks and balances, the risk of another intermediary failure remains significant.

Lessons from the fall

The Synapse collapse serves as a wake-up call for fintech companies and their banking partners of the urgent need for stronger safeguards and clearer responsibilities. At its core, the issue lies in over-reliance on intermediary platforms like Synapse without adequate oversight or contingency planning—exposing both sectors to significant operational and reputational risks.

What lessons can the industry take from this failure to build a more secure and resilient future for fintech-bank partnerships?

1. Oversight must be a priority
   Banks need to establish robust protocols to actively monitor the operations of their fintech partners. Partnerships that lack proper oversight, as seen with Synapse, create vulnerabilities that can escalate quickly, jeopardising consumer trust and business stability.
2. Transparency in fund management
   The opaque nature of “For the Benefit Of” (FBO) accounts has emerged as a critical weak point. Stricter reporting standards and greater disclosure are essential to mitigating risks and assuring customers of the safety of their funds. Improved transparency would not only protect users but also reinforce confidence in the broader fintech ecosystem.
3. Protecting consumers
   Fintech companies must prioritise contingency planning to ensure that customers can access their funds, even during operational disruptions. Stronger safeguards are vital—not only to shield users from the fallout of platform failures but also to rebuild trust after events like the Synapse collapse.
4. Innovation must align with regulation
   While innovation drives fintech’s growth, it must evolve alongside regulatory expectations. Building compliance into operational frameworks from the outset can prevent disruptions, protect reputations, and create a more stable foundation for future growth.

The end of the beginning?

The Synapse collapse has exposed vulnerabilities in fintech-bank partnerships but also created an opportunity for transformation. A key shift could involve fintechs diversifying their service providers to avoid over-reliance on a single intermediary, reducing the risks of cascading failures.

Banks may adopt more active roles in collaborations, integrating strategic risk management and co-developing safeguards with fintech partners. Regulators, too, have a role to play, with fintech-specific measures such as stricter transparency requirements for pooled accounts and mandatory consumer protections.

Ultimately, Synapse’s downfall marks a fault line for fintech. With the right response, it can become the foundation for a stronger, more secure future.

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