Troubled banking-as-a-service startup, Synapse, is facing even more challenges as a United States Trustee files an emergency motion to convert the company’s debt reorganization Chapter 11 bankruptcy into a liquidation Chapter 7. The trustee claims that Synapse has mismanaged its estate and has little chance of reorganizing successfully. This development follows Synapse founder Sankaet Pathak’s allegations that former partners owe the company millions. However, these partners insist that the allegations have “no merit.”
Synapse, based in San Francisco, was founded in 2014 by Bryan Keltner and Pathak and provided a platform for banks and fintech companies to develop financial services. It acted as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, among others.
On April 22, Synapse filed for Chapter 11 bankruptcy and announced that its assets would be acquired by TabaPay. However, on May 9, it was reported that TabaPay’s planned purchase of Synapse’s assets fell apart. Synapse blamed banking partner Evolve Bank & Trust for the failure, but Evolve claimed it was not involved in the sale and denied any responsibility. Mercury also disputed Synapse’s allegations of being owed money.
The disputes between the companies continued on May 13 when Evolve Bank & Trust filed a motion to restore access to Synapse’s dashboard system. Evolve alleged that it had been denied access to the startup’s computer systems, forcing them to freeze end user accounts. The U.S. Trustee argued that Synapse had inexplicably cut off access to its computer systems, causing end users to lose access to their funds. The Trustee concluded that Synapse had mismanaged its estate, and there were grounds to convert the case to Chapter 7 bankruptcy.
Synapse admitted that it had no more cash or approval to use any cash after May 17. A hearing for the U.S. Trustee’s emergency motion was scheduled for that same day.
In a creditor committee meeting on May 15, it was suggested that Synapse’s fintech clients might provide funding to enable the company to continue operating during Chapter 11. This proposal aimed to resolve the disruption to end users. However, it remains to be seen if this solution will be feasible.
TechCrunch reached out to Synapse for comment, but no response was received. An Evolve spokesperson confirmed that on May 11, Synapse disabled their access to an account and transaction information dashboard without prior notice. As a result, Evolve froze payment and card activity to protect end user funds and ensure compliance with laws. Evolve is currently working to obtain necessary information from Synapse.
The failed purchase by TabaPay for Synapse’s assets is a significant setback considering the company had raised over $50 million in venture capital from investors such as Andreessen Horowitz, Trinity Ventures, and Core Innovation Capital.
Overall, Synapse’s bankruptcy proceedings are marked by disputes, allegations, and mismanagement. The outcome of the case remains uncertain, but the involvement of multiple parties and the potential loss of millions of dollars make it a significant event in the banking-as-a-service industry.
