A Summary of the Synapse Saga

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There’s been so much going on in the regulatory compliance space, it’s hard to keep up with a lot of it. In today’s edition of our weekly newsletter, we briefly touch on what is arguably the biggest story in fintech – Synapse – while warning you that there isn’t really much more I can add that hasn’t already been said on this. What I will try to do is a quick hit on the basics in the ELI5 (Explain to me Like I’m 5) style:

1) Who is Synapse?

In a nutshell, they are a company that acted as a middleman between fintechs and the partner banks.

In the words of the CEO, from a 2023 interview – “Synapse is the largest Banking-as-a-Service (BaaS) provider and one of few that is licensed and regulated. We work with banks, fintechs and enterprises to launch and scale a wide range of financial services for fintech partners as well as enterprises to launch digital-first products with embedded financial features. Synapse’s unified BaaS platform is the most comprehensive on the market, providing payment, card issuance, deposit, lending, compliance, credit and investment solutions through simple APIs to more than 18 million end users.

In addition, to address the speed and efficiency part of your question, the greatest factor influencing time-to-launch in today’s environment is compliance review and approvals with bank partners. Because Synapse Brokerage LLC is a regulated member of FINRA, in most cases, we are driving that review and when services are required by our partner banks, we know through extensive experience what use-cases and funds flow scenarios are likely to be approved. Therefore, we can assist our customers through this process efficiently and effectively.”

A good example of this is with Juno, a crypto-friendly fintech that offers a debit card to be able to essentially turn crypto to cash in less than the standard 7 day timeline. Because of Synapse acting as the middleman, they can work with Evolve Bank & Trust (Synapse’s partner bank) to issue a debit card on the Mastercard Network to customers.

Another example of this is with Mercury, which offers no-fee business banking by using Synapse as the middleman (again) who connects it to Evolve Bank and Trust.

2) What changed?

A few things. From Forbes: “In August of last year (2022), FDIC-insured Evolve Bank and Trust, which had been the company’s primary banking partner, notified Synapse that it planned to end their relationship, according to a letter seen by Forbes. The breakup has turned messy after the discovery of a $14 million hole in a Synapse account at Evolve holding client funds. In response, Evolve is withholding a roughly $17 million payment owed to Synapse to cover the difference.”

• Ahead of the Forbes article, Synapse’s CEO wrote a Medium post decrying the reporting (prior to Forbes, from Jason Mikula) and essentially trying to point out the concerns about missing funds was valid from their side and without naming them, implying that it’s Evolve that should be to blame here.
• The same day that Evolve withheld the $17 million, Mercury decides to end its relationship with Synapse as well. It turns out later that both Evolve and Mercury thought it would be easier (in light of these issues) to just work directly together.
• Synapse lays off 40% of its staff after Mercury ends its relationship with Synapse. An article comes out saying Synapse has “four months to find a new fintech partner,” noting that at the time they still have partner bank relationships with American Bank, AMG National Trust, and Lineage Bank.
• A few months later Mercury files an arbitration demand against Synapse, seeking to secure $30 million of the company’s assets in the event of a shutdown which seems more and more likely given Synapse doesn’t appear to have found a taker to be able to house the Evolve funds, which they need to do before the end of the year. However, Synapse also states that they can ride it out until the end of 2024 as-is.
• The saga appears to have a happy ending, as payment processor TabaPay steps in and claims they will buy the company’s assets while Synapse files for Chapter 11 bankruptcy, with creditors named including Evolve, Mercury, and Lineage amongst almost a hundred others.
• Or maybe not. TabaPay announces just over two weeks later that it is backing out. Synapse’s CEO goes back to his Medium page and points the finger at, who else, Evolve, who say they are not involved, and he essentially says that this is because of a new 50 million gap that occurred when Mercury and Evolve’s respective relationships with Synapse were ending and Mercury withdrew more than they should have from its Synapse-related account. Mercury denies this.
• Things get wild last week, as the trustee appointed is an ex-FDIC chair from the Trump administration, and during the bankruptcy hearing Synapse’s CEO calls in from Santorini Greece which makes him the object of massive ridicule.

3) What is the fallout?

This is where it gets sad and ugly. There were a lot of companies that used Synapse as their middleman between themselves and Evolve and had customers of their own. Evolve is obviously where the money is actually parked; but on May 11, Evolve lost access to a “Synapse Dashboard” that they used to figure out the downstream allocation of money between the fintechs (since it’s all aggregated from their point of view) – while one could blame this on the bankruptcy, a bankruptcy judge actually ordered Synapse to restore access to the dashboard. In response, Synapse said that they had sent “final ledger reports” to all of its impacted banks, but said they could “get nowhere with Evolve.”

Where does the entire model of BaaS come into play? As explained by user RedKhaos on myFICO forums:

“Because Synapse is NOT a bank, its banruptcy has been extremely chaotic to put it mildly. In the case of banks, if any were to go bankrupt, there are strictly outlined and regulated processes that most commonly involve takeover by a FDIC agency. Bank employees would stay on to help coordinate the disbursement of depositer funds. A bank can shut down on Friday and customers would get their money next Monday. THAT is what a bank is.

In the case of synapse, it seems as if they just shut everything down and cut off employee paychecks. Evolve Bank has the deposits but has NO idea which customers own which accounts nor can they verify the identity of customers since Synapse effectively has the master ledger and customer information in their systems. It's a nightmare fraud scenario so Evolve shut down all withdrawals, because guess what, Evolve IS a bank and is subject to regulatory KYC (Know Your Customer) and due diligence requirements.”

There are numerous horrifying accounts on Twitter and Reddit that talk about the impact to customers of the downstream fintechs like Juno, Yotta, Grid, and others. I will link to some of the places you can check these out to get a flavor for the sobering reality of what this all means for the average ?person, the person who gets screwed over in the end when these companies, our legal system, and to this point, regulators, cannot get their act together:

https://www.reddit.com/r/SynapseVictimsFight/

https://www.reddit.com/r/OnJuno

https://www.reddit.com/r/Yotta

And of course:

https://www.twitter.com/mikulaja

Best wishes to all those customers who cannot access their money and can’t pay their rent, bills, credit cards, and put food on their table. All this is going to do is damage the trust folks have in fintechs, and no matter who is at fault here, unfortunately these are always the people that get screwed over the most. A dark time for the industry.