A coalition of senators is making a push for Synapse’s ownership and its banking and financial technology allies to “immediately restore customers’ access to their funds.” The lawmakers have attributed the loss of customer funds to both the affiliates and benefactors of the organization.
A letter made public on Monday showcased U.S. Senator Sherrod Brown (D-OH), head of the Senate Committee on Banking, Housing, and Urban Affairs, alongside peers Ron Wyden (D-OR), Tammy Baldwin (D-WI), and John Fetterman (D-PA), highlighting that since mid-May, patrons of entities partnered with the banking-as-a-service pioneer Synapse have been cut off from their funds.
Addressed to W. Scott Stafford, the president and CEO of Evolve Bank & Trust, the letter also targeted major investors in Synapse, in addition to its key banking and fintech collaborators. Notables among the recipients were former Synapse CEO Sankaet Pathak; investment powerhouses Andreessen Horowitz, Core Innovation Capital, and Trinity Ventures; American Bank; AMG National Trust; Trust and Lineage Bank; along with fintech entities Copper, Juno, Mercury, Yieldstreet, and Yotta.
Based in San Francisco, Synapse offered a mechanism for integrating banking services into others’ products, particularly targeting fintech companies. For example, it allowed a payroll software company catering to freelancers to implement an instant payment solution; others utilized it for distributing specialized credit/debit cards. Synapse served as an intermediary between Evolve Bank & Trust and the business banking enterprise Mercury until the two decided to interact directly last year, sidelining Synapse in the process.
Throughout its existence, Synapse managed to secure over $50 million in venture funding, with a notable $33 million Series B round in 2019 led by Andreessen Horowitz’s Angela Strange. The startup faced challenges in 2023, leading to layoffs and a Chapter 11 bankruptcy filing in April, aiming for a $9.7 million asset liquidation sale to fintech competitor TabaPay, which ultimately fell through. While Synapse attributed much of its issues to both Evolve and Mercury, who refuted these claims to TechCrunch, Synapse co-founder and CEO Sankaet Pathak has ceased communications.
Following this, a U.S. Trustee pushed for Synapse’s Chapter 11 bankruptcy to transition to Chapter 7, citing severe mismanagement, leaving customers in the lurch ever since.
Authorities have held fintech partners accountable, critiquing their involvement in the debacle.
The senators in their correspondence insisted that all parties involved, including venture capitalists, “are obliged to ensure the protection and availability of consumer funds.”
They called for a collective effort to unfreeze all customer deposits currently locked due to the bankruptcy proceedings of Synapse.
They specifically highlighted: “Each entity bears responsibility for clients now locked out of their accounts. Consumer-facing fintechs promoted their offerings as safe, dependable bank alternatives. Relying on these assurances, consumers transitioned to their services. Venture capitalists financed Synapse without demanding sufficient safeguards for consumer protection. They anticipated profits while heralding Synapse as a reliable financial infrastructure purveyor, but neglected to ensure the fulfillment of its promises. Banks engaged with Synapse seeking new profit avenues, facilitating a platform for Synapse to extend its bank-provided services.”
The senators expressed grave concern over the estimated $65 to $96 million discrepancy between consumer-owed amounts and the funds secured by Synapse’s bank partners, deeming it “exceedingly alarming and utterly indefensible.”
They added, “Time will reveal the chief culprit in this crisis, but restoring consumer access to their entirety of funds remains the urgent priority.”
Furthermore, they criticized the banking-as-a-service model in light of the Synapse bankruptcy for uncoverning its systemic fragilities and causing considerable financial access issues for Americans and small enterprises.
Recent events have spotlighted troubles within the banking-as-a-service sector. On June 26, Evolve Bank disclosed a cybersecurity incident and data breach potentially impacting its partner firms. The breach, per the firm, compromised “data and personal information of some Evolve retail banking customers and financial technology partners’ patrons” including Affirm, Mercury, Bilt, Alloy, and Stripe. In the same timeframe, fintech enterprise Wise alerted that some customer personal data might have been compromised. Additionally, last week saw Thread Bank, a BaaS startup collaborator for Unit, undergoing a regulatory reprimand from the FDIC, with Paymnts underlining the explicit focus on its BaaS and LaaS endeavors.
TechCrunch attempted to obtain remarks from both Evolve Bank and former Synapse CEO Sankaet Pathak. Evolve opted not to respond.
This narrative was updated subsequent to its release to note that the firm had not yet undergone liquidation under Chapter 7 bankruptcy.
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